The North American Red Queen - Our Natural Gas Treadmill

I recently attended the ASPO-USA World Oil Conference: Time for Action - A Midnight Ride for Peak Oil in Boston, MA. Interestingly, the conference organizers appended the acronym ASPO, to represent the Association for the Study of Peak Oil and Gas for this gathering. Indeed, much more time was spent discussing the North American natural gas problem than at any prior Peak Oil conference I am aware of. Prominent among the presenters addressing this situation was David Hughes of NRCan. Mr Hughes is a senior geoscientist with the Geological Survey of Canada who has been speaking widely on global and North American energy sustainability issues over the past few years to governmental agencies, industry forums and the popular press. He painted a sobering picture of North American Natural Gas Supply - in effect we are trying harder and harder and spending more energy and dollars just to maintain flat production. This post is essentially a summary of David Hughes ASPO NG presentation (he also gave a talk on the Oil Sands) with some added comments and perspective.

North American natural gas producers are likely in Georges shoes...

[break] THE RED QUEEN



"Well, in our country," said Alice, still panting a little, "you'd generally get to somewhere else -- if you run very fast for a long time, as we've been doing."

"A slow sort of country!" said the Red Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"
Lewis Carroll - "Through the Looking Glass", 1865

NATURAL GAS

As was disussed here, the North American natural gas situation has a) been a story of two separate markets - flat to declining supply and flat to declining demand and b) the volatility in the market is giving policymakers the wrong long term price signals for this valuable commodity. (For basics on natural gas, both conventional and unconventional, search writings on theoildrum.com by both Heading Out, and Dave Cohen)

Here, I update the supply side of North American NG with information I learned at last weeks ASPO conference. This post is based largely on the excellent and thorough presentation given by Dave Hughes from Natural Resources Canada (NRCan). His entire presentations (which I encourage everyone to read), along with the other ASPO presenters, can be found HERE.

We need gas to heat our homes, make plastic, make nitrogen for fertilizer, make diapers, produce electricity, etc. Second only to oil, natural gas has many uses vital to our modern way of life. With the glaring exception of electricity due to large capacity buildout when everyone expected cheap gas of the 1990s to last, NG consumption has been declining domestically:

United States Natural Gas Consumption (Source David Hughes ASPO Presentation)

As can be seen, total NG consumption in the United States has been relatively flat over past decade. The demand side of the equation (almost as important as supply) is a story in itself and will be addressed in a subsequent post. With respect to supply, the good plentiful stuff has been found, pumped and used on our continent. The US peaked in production in 1973 with another peak in 2001. Canada appears to have peaked in 2002 and is currently piping 51% of her gas to the United States. Though there remains a large amount of natural gas reserves worldwide (though data is unreliable), it is difficult and expensive to transport. ( Dave Cohen will be writing on the LNG side of Mr Hughes presentation soon.) As the graphic below indicates, in the past 25 years, Canada, United States and Mexico have gone from having 12% of world reserves to 4% and we have 10 years of reserves at current production rates.

World Natural Gas Reserves (Source David Hughes ASPO Presentation)

We are drilling more, finding less, what we do find depletes faster and has fewer cubic feet. The below graph sums up much of the Canadian NG situation.

The Canadian Treadmill (Source David Hughes ASPO Presentation)

Not only does Canada use more rigs, but each new pinprick in the earth is producing less of the commodity and at slower rates. The province of Alberta has about 3/4 of the gas reserves of Canada. The trend of the below graph is obvious:

Alberta Gas Productivity (Source David Hughes ASPO Presentation)

With Alberta also increasingly using NG to turn bitumen into oil (or gold into lead as Hughes repeated), how does the priority chain stack up for the remaining NG reserves? Other provinces?, more tar sands?, send it to USA?, heat Albertians (I think thats a word) homes? Not talked about much even in circles that have connected the dots of energy supply problems, are the local and regional alliances that may or may not fall along traditional borders. Another post for another day...

Lest we forget, there is another treadmill south of the border. Here is US production:

United States Treadmill (Source David Hughes ASPO Presentation)

By 'treadmill', I mean we are drilling more and more just to stay in place. As geology turns up the speed of the treadmill, we may not be able to keep up at prices consumers can afford. Indeed, Mr. Hughes mentioned (and this point was echoed by Matt Simmons)that if we stopped drilling today, we would produce 30% less gas next year, and 30% less the following year, etc. In other words, without an athlete running on that treadmill, we'd be down to less than 25% of our current production in just 4 years. And this is the AVERAGE depletion rate - new wells drilled today are depleting at up to 60% or higher. (In Canada first year decline rates are as high as 39% but tend to become less with successive years (ie production follows a parabolic decline). The overall decline rate in Canada is now about 20%).

And the new fad (old technology) of horizontal drilling used by Devon Energy and others, in effect gets gas out of the ground even quicker without meaningfully increasing the total EUR. (Its like the industry found a bigger straw, and since society is thirsty, the default strategy is to get the gas to market as soon as possible. This is neo-classical economic behavior at its best, but as evidenced by Chesapeakes announcement last month to shut in production due to low commodity prices, has its lower boundaries).

The flattening of production is occurring with an overall increase in rig count, and the vast majority of rigs being used to drill for gas. Increasingly, rigs are moving out of the Gulf of Mexico (GOM).

Cameron Gingrich, lead project analyst for Ziff Energy, a Calgary-based consultancy, says "The Gulf's gas will fall from 25% of the total U.S. supply in 2000 to 8% in 2014, as total offshore output will drop from 13.9 to 5.8 billion cubic feet a day.

This has additional 'Red Queen" implications. The gas productivity differs in Gulf of Mexico vs onshore. Equity firm, Johnson Rice, specializing in E&P companies, recently noted that the 65 rigs recently leaving the GOM (most for overseas), translates into 500-650 land rigs needed. Lest we forget that our other favorite fossil fuel is also desired, oil drilling is a source of demand for incremental rigs 330-340 rigs are being used for oil, up from 220 a year ago (Source - Johnson Rice)

It's important to note that in the above graphic that the Energy Information Agency is optimistic that by 2014, despite the increase in rig count, faster depletion and smaller wells, we will make new highs in domestic production due to increases in unconventional sources, like coalbed methane (called coalbed gas in Canada) and shale gas. The below graph is data from the EIA on a UCO presentation:

United States Conventional vs Unconventional NG Production - (Source UCO Corporate Presentation)

I recently spent 3 months in British Columbia. One phenomenon I witnessed, and I expect more and more in the US, was vitriolic public reaction to proposed CBM development. I attended a rally in Smithers, BC, where residents were opposing a proposed CBM project in Telkwa, BC. 20%+ of the local adult population showed up to listen (heckle?) to a panel of government and energy officials explaining the merits of CBM for the community. The residents were concerned about the water quality of the Bulkley River (shown here with my dog Quinn), rightly so as it is their lifeblood and one of the best steelhead fisheries on earth. What was not discussed at the rally/forum was that without natural gas, how will people heat their homes in a town that has winter air inversion issues? (i.e. everyone using wood, would be bad)

This type of public opposition is likely to intensify as we move from the easy, less obtrusive oil and gas locations domestically to more obscure, less quality ones in more remote/pristine places involving different land and water implications.. Unfortunately, our energy demands have laid the groundwork for an immense arms race between energy and the environment. Each time people raise their perceived value of ecosystems and nature, energy prices will be ratcheting up again. Tough choices are going to have to be made.

Energy Profit Ratio for gas sources (Source David Hughes ASPO Presentation)

In many senses, the story Ive presented so far can be explained by the above graph. We have used the 'best, first' for natural gas (and oil). The harder stuff takes much more energy (and dollars, and environmental externalites, and labor, and time, etc). A previous TOD article on net energy, or how much energy is left for society after the energy sector uses what it needs, can be found here.

CBM wells in the US with water production generally produce water for the first couple of years then gas with a lower decline rate. In Canada, however, most commercial CBM production comes from "dry" wells with higher decline rates - more like shallow conventional gas wells. (Source - D. Hughes). There is a large energy (and $) expenditure to get to the point where you are actually producing gas.

Dave Hughes Summary Points for NA Natural Gas(Source David Hughes ASPO Presentation)

Mr. Hughes pointed out that the amount of reserves that are energetically recoverable for the non-conventional sources are much less than the total reserves in government forecasts. The total area in each of the above triangles represents the gross resource while the black area represents the net. While government and industry are accustomed to quoting gross reserves, society cares about net energy. (well they don't but they should.) The Red Queen analogy is basically a net energy argument in a Tainter sense - the more resources we throw at extracting resources, the less the rest of the economy can grow.

Technology will attempt to buttress the decline in the net energy and quality of fossil energy sources. However, in many cases this 'benefit' may end up being a Faustian bargain. As horizontal drilling techniques speed up the flow of gas in order to stay on the treadmill, they change the ultimate depletion profile of the resource,(and I now include oil in the discussion). The technology that Devon Energy uses for gas wells in Texas or SaudiAramco uses for maintaining pressure on Ghawar, is getting us extra production today but at a cost of borrowing from the right hand of a typically bell shaped distribution curve.

By taking the energy from the ground we are borrowing from the future to begin with ( a loan from mother earth?). By using advanced techniques to get it out faster, we are adding 'leverage' to the equation, in a situation when our financial system has already maxing out on credit. In my experience as an investment manager, leverage always ends badly.

SUMMARY

I encourage everyone to read the online pdf of Mr Hughes ASPO presentation- there is much more valuable information than I could present here.

Here are Mr Hughes summary points:

Dave Hughes Summary Points for NA Natural Gas(Source David Hughes ASPO Presentation)

Later in the conference, Matthew Simmons equally interesting and sobering presentation also concluded on the topic of natural gas:

Matthew Simmons closing slide from ASPO/Boston(Source ASPO Presentation)

THE BOTTOM LINE


Natural gas is very important. It is also not easily tranportable other than over land. Conventional natural gas in North America is past its peak. It is well past the peak of the easy to get at, environmentally (relatively) friendly, and energetically highly profitable point. To get more, we need more rigs, more holes, more places to drill, and more by unconventional means. Alternatively, we could buttress our treadmill with Liquefied Natural Gas imported from Qatar, Russia, Iran (the vast majority of reserves), or elsewhere.

We have taken the low hanging natural gas apples from the tree and now have to climb the tree. Soon we will require ladders. Eventually large ladders and parachutes. To get that last apple we might need a helicopter and commandos, who eat more than one apple a day in any case.

We should take advantage of these mid-tree apples and use them to our best advantage, while trying to replace as many apples in our diet with pears (wind), peaches (biomass), oranges (solar), or a wafer thin dinner mint (conservation).

If the treadmill really speeds up, at least we have Astro to keep us warm.

Resource Depletion - A View From Planet Talos

This is a guest post from First Talosian, the senior member of the planetary expedition force from Talos. I am posting the correspondence as we received it, unedited. (there are spelling and grammatical errors). In it he describes his culture's perspectives on Earth's history and future with particular emphasis on our energy and ecological intersections. The graphics were added by me after reading his letter.

First Talosian of Talos


[break]

Greetings to all Homo sapiens and any others on Earth who can understand this,

Each 10,000 years, one of our vessels visits your planet to observe, learn and enjoy its rich diversity. We cannot breathe your air for long (the 'air' on Talos is 88% Oxygen) so we park our vessel during our visit and observe by spectral telemetry screens. (Our ship is 3 miles above western Ecuador, but is cloaked - even your 'advanced' military will not find it).

According to our records, your planet is 4,588,250,000 years old (Talos is almost 7 billion). Our race is extremely old. We developed space travel about 800 million years ago and have been coming to earth for almost that long. To our knowledge, there are 19,056 planets in the universe (and there are actually 2 universes) that possess the genetic combinations that you call `life'. However, your planet contains over 16% of all species in the universe (over 10 million) and as such has long been one of our favorites. Too, we are very smart (to our knowledge the smartest among interstellar life-forms.) Our brains evolved to be extremely large due to special conditions on Talos that no longer exist.

Our Planet Talos (very far away)

We continue space-travel to different galaxies to experience new sights and experiences, the memories and quandaries of which then circulate in our minds for millenia like a hundred sided rubicks toy cube. Otherwise we get bored quite easily and experience mental decay. Sadly, the females of our race died out 20 million years ago so we cannot reproduce. However, our scientists (in particular a genius even by Talos standards named Cornelius), discovered how to regenerate neurons with virtually no thermodynamic loss, thereby stopping aging almost completely. There are now 1,752 Talosians left, and for all purposes we are immortal on your human time scale. Too, we bleed and laugh and experience joy and pain just like we observe you do. A bullet or a bite from a jandar would be just as deadly for us. But we are cautious. Now let me continue.

This is my 19th visit to your blue planet. My first trip here was in your year 4,529,665,520, which was just before the asteroid impact that removed the large mammals and well before the primate line began from the morphological isolation of a tarsier colony. But most of my visits have been in the last 2 million years, and this is my 11th trip in a row (110,000 earth years). On my last visit here 10,000 years ago, there were only about 1 million hominids on the planet- in a fraction of earths history your population has increased 65,000 fold. Let me continue. (human: insert graphics here)

Imagine this is the 5,000th graph laid side by side - the other 4,999 would all look like the left part of this one

Click twice on the above graph to make it clearer

What stayed underneath your planet's crust for millions of years, is now being sucked out rapidly in order to maintain your current social trajectory. For us this would be tragic as we are extremely long lived and the 0-20 years in which you quarrel about when Peak Oil arrives is irrelevant. Talosians long ago matched our consumptive needs with our planets unique solar flows, (even though we had to import certain technologies that enabled us to accomplish this).

Our purpose on Earth is mostly benign. Other than the Talosian utility we get from observing your biodiversity and it's interactions, each time we come we replenish a supply of DreamGrubs, which are only found on your planet, in Ecuador and Peru - we bring them back and breed them. Consumption of 15-20 of these grubs induces sleep followed by 3-4 days of vivid colorful dreams - dreams that for some reason always include having children, so you can imagine our desire for them. The grubs were once highly competed for but we are less than 2,000 now so have plenty to share. Our other purpose is less benign, but cannot be spoken of. Let me continue.

Your beautiful Planet






Congratulations, first of all, to your human ancestors. They successfully out-competed thousands of other species for resource acquisition and were able to squat in the most productive ecosystem areas. Wondrous creatures we remember from past millennia like saber-tooth tigers, mastodons, and dapling wolves (you are yet to find their skeletons), were muscled out by the recent global advance of your tribes. After you split from the main primate line 5 million years ago and then rapidly developed a larger and larger neo-cortical region during the climate volatility 500,000-1,000,000 years ago, your ability to think, imagine and create has become unique on your planet. However, your basic neural impulses originated from the same phylogenetic pathways as all creatures on earth, and as such a Talosian would view your culturally implied superiority over other sentient genetic combinations as misplaced. The primitive `reptilian' brain that activates your fight or flight responses and regulates your neural-endocrine cascade system is over a half a billion years old and shared by all earth creatures that move away from painful stimuli and towards food, energy and warmth. Your emotions, part of an intricate limbic system that fears, hungers, wants, sleeps, plays and feels satisfied has largely the same sea-horse shaped structure( with the exception of its interplay with the frontal cortex) as all other terrestrial mammals,. Too, it must be so, as you evolved from them. It is your neo-cortex that separates your behaviours and potentials from the other mammals and the size of it that further explains your recent success relative to the other 310 primate species. Let me continue. (human -insert graphics here)

The Triune HomoSapiens Brain

On this visit to earth I am experiencing unpleasant sensations. This is the first time my crew feels fear at what we will discover here on our next voyage. Homo sapiens has clearly won the earth resource lottery ticket. Through the incredible, but mathematically probable, relentless success of your ancestors, your neural circuitry through natural selection has become wired to locate, concentrate and consume resources. All creatures do this, but you have become the best at it. Because you are the best, your activities are squeezing out other species you compete with, that don't possess your large brains. Only in the current generation has this propensity begin to run up against boundaries in both inputs (resources) and outputs (homo sapiens waste products).

The fossil fuels that you have built modern human tribes interactions around, are running out. They started running out the first day you decided to harness them. We knew that one day one of several species on this planet would puzzle out how to access and utilize the highly concentrated forms of energy buried beneath your planets surface- we have had many debates and dreams of how this species (which we now discover is human) would utilize this bounty. You are still a young species, and your rational, cognitive systems are as yet not strong enough to overcome your emotional urges from hundreds of millions of generations of selection as mammals and more recently the tribal competition and social cooperation that selected for brain expansion during the Pleistocene. With wiring so geared towards sharply valuing the present over the future (what your econo-humans call `steep discount rates'), it was somewhat to be expected that the oil and gas would predominantly be used as quickly as possible once found. What has surprised us, is how little of this energy has been spent building infrastructure that will sustain your species once the fossil remains fully deplete. Of even more concern to the Talosians on our ship, is how little of this energy has been spent protecting and sustaining the other species that did not win the fossil lottery. In fact, it seems some historical roles have been reversed.

Role Reversal

Talosians have much knowledge of things, but it is our policy not to interfere with other planets own evolutionary processes. Even this correspondence to www.theoildrum.com is a borderline violation of our Central Committees' bylaws, but as First Talosian, and a childhood dreamer of Earths beauty and diversity, I have chosen to share some of our thinking, with the intent that it might influence people to view Earths' situation with a slightly different lens - perhaps lessening their discount rate and thinking more of the future. Our long lives make our brains run more like computers (zero discount rates), as opposed to drug addicts (very steep discount rates). Without trying to label or judge human value systems, we have come up with the following observations of planet earth and her supply and demand situation for energy. Let us proceed.

ENERGY

99% of the species ever to live on planet earth are no longer with you - their 'technology' was not adequate to supply sufficient usable energy as their environment changed. This is what faces human systems now, but of all, is the simplest problem to address. Energy is germane for the energy services it provides. Human choices for a certain way of life dictate how much and of what form of energy you need. The two previous human generations designed speed-vehicles and tall structures and a vast network of economic comparative advantage trading depots, all requiring large inputs of inexpensive liquid fossil fuel to move items to where they were needed. This was all built on your assumption of perpetually negligible transportation costs. This was a trajectory that was shaped before you were born. But it falls on your generation to recognize it as unsustainable (and perhaps undesirable, though we don't 'know' your preferences). Given that all of the highest quality fossil fuels will be consumed in one human generation (2 at most), there only exists one sustainable supply side strategy. And that is to transmute remaining stocks of fossil energy into renewable forms. You have fossil stocks of fuel (S) and renewable flows of energy from the sun (R). From the perspective of a long lived species, promoting infrastructure and systems requiring high net energy fuel sources that will deplete within a generation shows the inferior intelligence of your species (my apologies, rather, it highlights your evolved response to heavily overweight the present).

Here is how we view the energy side of your problem.

Earth still possesses fossil resources F1, F2, F3...FX....where F1=high quality oil, F2=tar sands, F3=coal, etc.

Earth has potentially harvestable renewable sources R1,R2, R3..RX... where R1 might be wind, R2 =solar PV, R3=hydro,etc.

X= Energy Output *(R/(S+R)) / Energy Input * (R/S+R)

To view your situation from a net energy perspective is superior to abstract economics, but sustainability of the strongest form would preclude any fossil fuel usage, unless to create regenerational infrastructures. The sum total of new energy schemes for your species should maximize for X(X1,X2...X?), which in effect is producing the largest renewable output for the smallest fossil input. For interests of sustainability, to create diesel fuel from coal in this formula is only a stopgap measure, as all your fossil input does not create renewable flows. Once S is gone, X will equal the sum of all R1,R2...R?. Put simply, you want to have the highest renewable energy return on your remaining fossil resources not used for basic needs. However, before you do this in earnest, we 'recommend' that you examine your end goals first - this will prevent 10 earth years and 300 billion barrels of oil burned attempting to create the same ends you now aspire to, before discovering the dead end. Let us continue

THE PURSUIT OF HAPPINESS

Satisfaction, for all creatures is generating a neuro-endocrine-hormonal balance that feels right to them. Evolution has shaped brains (through a relentless fitness filter) to maximize copies of genes sent to the next generation, and to help those genes (in the form of offspring) survive. Humans (and Talosians, and squirrels) are born equipped to learn certain behaviours easily and other things with difficulty or not at all. Humans cannot take down wildebeests with their fingernails. Squirrels cannot type HTML code. Prepared learning does not suggest your paths are predestined. A squirrel does not automatically know how to crack a nut, but once he tries it several times, he is better at it than most species could ever be.
It appears to us that homo sapiens scientists are fast discovering the importance of the brain/behaviour link. If we could only trust you and breathe your air, we could teach your neuro-economists some shortcuts towards designing institutions that would be better fits for your biology.

Every day you each attempt to attain the same total brain cocktail (and this is simplified) that caused your ancestors to meet with evolutionary success (have offspring). While this may not be your conscious goal, in a world full of high energy fuels, the competition instinct manifests in planetary consumption. Such may or may not move you up the human mating ladder but is clearly a bad thing for some. As a species, you would be well served to select activities that give you the same 'total brain cocktails' as you were designed to experience, but cognitively choose them from lower energy footprint options.
Humans get this cocktail from activities such as sharing, eating, solving problems, novelty seeking, sex, competition, love, cooperation, playing games, etc.

In effect, both individuals and society should attempt to optimize

B/R, or Total Brain Cocktail / Resources (of which Energy is an important one)

If you get the same feeling of excitement or contentment from building a chicken coop with your family as a shopping center with your real estate team, or playing parcheesi with your neighbor as playing a golf tournament in Las Vegas, you will be pursuing darwinian happiness. The trick is acknowledging that your intelligence is not strong enough to overcome your emotional systems, and then using your intelligence to plot a course through that neural minefield. Let us continue.

But humans, like Talosians, also can imagine a future, sometimes with hope and sometimes with dread. The above equation B / R is a precursor to what humans might call happiness(or an econo-human might call `personal utility') It is a combination of your current brain cocktail combined with a discounted present value stream of all PERCEIVED future brain cocktails. If you engage in wild hedonistic pleasures, you are getting much of the former, but knowledge and experience in the neocortex tell you that your future is being eaten into by dangerous sex, drugs, spending money, or the like. Humans inherently optimize the equation:

U=Bt + (Bt+1)/(1+d) + (Bt+2)/(1+d^2) +......(Bt+x)/(1+d^x)

which states that Utility equals your current 'brain cocktail' plus all future brain cocktails that you expect (at the current moment) discounted by a discount rate d. For most animals on your planet the discount rate is near 1, meaning they dont know there is a future - so for sub-primates at least, the above equation simplifies to U=Bt. Humans still have steep discount rates of up to 20% (meaning that events beyond 10 years hold virtually zero weight in daily decisions) but you can delay gratification in ways that earths other creatures cannot

Since Talosians are long lived species the impact of Bt of the present moment (the first term on the equation) is greatly reduced. For humans to access future thinking however, you are limited by your wiring. To take advantage of knowledge of this, you can:

1. given a choice between consuming now or consuming in the future, you should make the perception of a future with nothing to consume seem less appealing, therefore weighting the `saving' mechanism and delaying consumption.
   
2. reduce the discount rate in the equation. Since you are genetically constrained, this could occur through cultural changes in mores and values.
   
3. become addicted to a drug, thereby radically steepening your discount rate so that the future seems very distant, less important and therefore less painful.

I suspect that the event you are calling 'Peak Oil', which a Talosian would just call 'half-time', will produce many humans in all 3 of the above categories. Let us continue.

EARTH POPULATION

Most thinking humans would look at the above population chart and wonder how high it can go, especially given the coming resource constraints. How do you value a human life? How do you value an animals life? How do you value other species who do not have as developed a neocortex as your own? What price is a lion? What price are all lions? These are questions your society may face - clearly one human life is worth more than the life of one lion - but what about one human vs 1000 lions? Or one human versus the entire lion species? And what is the end goal for humanity? To have the most humans as possible? To have the most `happy' humans as possible (acknowledging this might be less than the most humans). Is having 6 billion happy creatures preferable to 12 billion miserable ones. This gets at the quality of life issue and at some point or other these questions will be looked at on your world. To run pell mell into an ecological overcapacity situation without examing them will end badly. While the situation is still manageable, humans are ingenious and clever, but when it becomes unmanageable, I fear you will revert to less cognitive behavior. I ask these hypothetical questions, because our society has been through this all before. Here is how we did it on Talos (the second time around)

We maximized, using the previously stated formulas:

Bt*P which equates to Darwinian Happiness * Population

A weak form of this formula for your planet might only include homo sapiens in the population. A stronger form would assign a sentience quotient to all other species that have the ability to feel pain, joy, and experiences. A dolphin might be equal to 4 dogs and a monkey might be worth 7 dolphins and a human might equate to 9 monkeys, or some such. Mathematically,

P*=Sum (A==>Z)(C)*(B)*(P)

where A thru Z are all Earthbound sentient species, C is their sentience factor, B is the darwinian brain cocktail from above and P is their population. In this stronger form, we maximize P*. This seems the only fair way for the most advanced species on a planet to incorporate the value of its planetary neighbors. (Talos once had almost 1 million species and our drive to develop warp capability raised the temperature beyond what most species could tolerate.)

Perhaps human value systems are unique, and the continued existence and freedom of other species is a benefit in its own right. I do not know, things have changed a bit since my last visit.

PUTTING IT ALL TOGETHER - THE ENDS

X==>U*P

Given the ultimate renewable energy flow, you should want to maximize the utility of the population, or given the utility of the population, you should maximize the ultimate renewable energy flow. I wish you luck.

In a generation your fossil fuels will have been largely used. It is of some urgency that you prioritize use of the remaining high quality fuels, while a global infrastructure still readily functions, to turn these fossil stocks into renewable flows. But before you do this, you must examine your end goals. Can you experience happiness consistent with your evolution by consuming less energy? Can you find ways to value the future at least a little bit more than you do now? Can you articulate what is the goal of life on earth, scientifically? Does that articulation include other life forms, that are bystanders to the rabid pursuit of more fuel and planetary thermodynamic throughput? The answers to these questions will dictate what types of energy infrastructure will be needed and guide energy investments going forward.

To a Talosian, the way that humans rank things is strange. Your daily hierarchy is money-luxury-energy-food-water-environment. On our planet, we have the exact opposite ranking system, and money is just used to purchase luxury items (like grub-drug). However, our planet twice witnessed ecological disaster on a large scale, with green life forms nearly disappearing. Subsequent generations of Talosians worked together to prioritize fragile ecosystems that now provide life support functions for our remaining population and 38 other species.

I advise your tribal units and their tribal units above them to imagine an earth without everything you see in it now. Erase from your minds for the time being all the Wal-marts, Disneylands, KFC's and concrete. Imagine waking up tomorrow and creating a world where things worked, people were happy and healthy and the environment was safe. I am not human so don't know what that would look like - perhaps the world you have created is just so. - If it isn't then determine and clarify what you desire. What makes you happy. What are the sustainable things that bring most holistic fulfillment as individuals, as tribes and as a species.

What are your values? Do not confuse your values attached to a seemingly fixed infrastructure with your true values. Once you elucidate clear values, rely on a combination of self-actualization towards these values on a local scale and on social contract theory on a macro scale. Your species has been shaped to follow rules set by the predominant culture and rulemakers. Determine your ends/values democratically, and have your human governing body use science to create the social contracts that most efficiently map a plan from today to tomorrow. This plan should balance the two goals of maximizing the likelihood of attaining your new ends, and minimizing the chances of slipping down the historical slope of war and chaos.

Determine the ends first without the momentum of the current means to guide you. Once you outline and put mental color on new ends, engage your best scientists and citizens to make it so.

I can not, nor would I, judge and choose a human value system. You must consider this and choose for yourselves. But do not do so from the static world as you see it today. Envision the world as you want it to be first. Then draw a path from today to tomorrow. And start soon.

Let us close

In Sincerity,

Ember Dyadicon

First Talosian

Nov 2, 2006 (Actually 4,588,250,000)

Post-scripte-I was charged with delivery of this note.

Everything Ember said was to convince you to save the climate so he can keep on harvesting DreamGrubs. If climate change alters their ecosystem he is going to be pissed.

Thaddeus Grommaker

Assistant to First Talosian

Natural Gas - A Tale of Two Markets

This post will provide a graphical update on what has been a roller coaster ride in the natural gas market over the past 12 months, and a steep plummet of late. Natural gas prices have dropped by 50% in the last month, and over 70% from their highs earlier in the year. The warmest winter on record and not a single rig-damaging hurricane have combined to create record gas in storage, thereby reducing price demand for the marginal unit. Yet, production is flat with last year despite significant more drilling and rigs allocated to the commodity. The current situation is thus one of short term plenty and long term supply concern. If longer term predictions of reduced supply and accelerated well depletion are correct, we should be seeing some of the major producers reduce rig counts at these levels, or shut-in their production with intent to sell it higher in the future. This post examines the supply/demand equation for natural gas in the US, the NG futures strip, and the implications going forward of higher price volatility in this important commodity.

[break]

(For those unfamiliar with how the energy futures markets work, here is some background info.)

Natural gas. It does everything from heat our homes to fertilize and cook our food. And unless you've lived in a climate that doesn't require air conditioning or heat, you've probably heard of the wild swings in the gas market in the past year. The price drop has caused fits, threats and lost bets. Each day the natural gas market goes up or down. This year, its pretty much gone down.

Click to enlarge.

The two markets I refer to in the title are supply and demand. But I could just as easily be referring to the dichotomy between near term prices and long term. The above chart (and most news services (CNBC, etc) quote what the 'front' or near month for oil and gas futures is doing. However, these commodities can be traded for expiration each of the next 60 months. A 'futures strip' is comprised of the entire forward market for a commodity. The complexity of the short and long term supply/demand situation can be better understood by looking at the entire curve. Below is a graphic of the futures strip from NYMEX.com of last fridays close for natural gas. (it was down again on Monday). As can be seen, prices are very low for October and November 2006 then form a sine wave pattern for the next 60 months, with peak prices expected in winter months, when heating demand is high. (Note, the above chart shows historical prices over 10 years, the below chart are todays prices for delivery the next 5 years in the future)

Click to enlarge.

We will return to the futures strip at the end of this post but first give a review of the current dynamics of the natural gas market.

NATURAL GAS SUPPLY

The Peak Oil (and Natural Gas) crowd typically focus their worries on the supply side of the market equation. The supply story for natural gas, at least domestically, does not look promising. The United States has roughly 400,000 natural gas wells operating currently, near an all time high. First of all, lets look at total production in the United States. (The difference in the two lines is the top one includes 'wet gas' or non-gas liquids which are added into the petroleum supplies.) (Source EIA)

Click to enlarge.

The following is a graphic showing how quickly the average new gas well is depleted. (this is for wet wells but dry wells appear to be depleting slightly faster) As can be seen, a decade ago, it took 10-15 years for a new well to deplete. Now they are going dry in less than 18 months.

Click to enlarge.

In addition to quicker depletion, wells are smaller and hence less productive: (Source EIA)

Click to enlarge.

We are drilling more wells and smaller wells. Equity research house Johnson Rice recently put out a report showing that from Q2 2005 to Q2 2006, the top 20 NG production firms were down 2.4% in production yet had increased rig count by 22%. (this doesnt include shut-in production).

HELP FROM THE NORTH?

Canada produces about 6.2 TCF per year and exports 3.6 TCF to the United States. However, they too are declining in production with a large increase in wells - a similar pattern to the US. The graph below shows Canada producing about the same amount of NG as in 1998, but needing to drill more than twice the wells annually to do this. (Don't get me started on net energy)

Click to enlarge.

This is a broad sketch of the supply picture - of course there are coal bed methane and liquefied natural gas, but the impact of both is uncertain, and with natural gas currently with a $4 handle, those sources may be uneconomical or not come to market in a timely fashion. To me, the North American natural gas supply situation can best be likened to the Red Queen in Alice in Wonderland, who kept running very fast just to stay in place - if she slowed down, she might go backwards rapidly.

NOT SO FAST MY FRIEND!

Natural gas demand is the other half of the story. The US (in 2005) used just under 22 trillion cubic feet of natural gas. Believe it or not, this is less than we used 10 years ago (compared to a 13% increase in crude oil).

The 22 TCF roughly breaks down as follows: 24% for residential heating, 14% for commercial use, 35% for industrial use, and 27% for electric and combined cycle power.

Click to enlarge.

Though many say that closure of industrial and chemical plants domestically due to high NG prices is responsible for the drop in industrial demand, as can be seen from the chart, this trend has been in place since the late 1990s, when gas was still cheap. If I was a manufacturer in Toledo paying $17/hr why wouldnt I move my plant to Mexico and pay $4/hr for wages? It is unclear how much more demand destruction can come from the manufacturing sector. However, electricity demand and its use of natural gas has surely been growing.

THE NEW GODZILLA MOVIE - "GLOBAL WARMING VS GAS DEPLETION"

The past winter was the warmest on record. But just how warm is not commonly known. The dark red patches in North America in the below graph are 4-13 Degrees C above the historical average - needless to say, less people needed natural gas for heat (except in Russia - where they had the opposite trend in January)

Click to enlarge.
(Source - James Hansen NASA 2006)

The warm temperatures contributed to much less demand for heating not only in the dead of winter, but in the spring as well. April, May and Jun 2006 each saw less natural gas usage than any equivalent month for the last 33 years. So far through 2 quarters in 2006, residential customers have used 12% less natural gas than 2005.

BACK TO THE FUTURE(S) - WHAT A DIFFERENCE A YEAR MAKES

Click to enlarge.

The pink line represents what the futures strip looked like in September 2005. The blue line represents the futures strip on Friday. (Notice, we are missing 12 months of pink line at the end because last year 60 months only brought us to 2010 and we are missing 12 months of blue line at the front because fridays futures are only looking forward, not backward)

What we see here is that the front month, which at one time was over $15 is now at around $4.50, an historic drop. However, a year or so out there has been a much smaller drop and at the end of the futures strip (2011) prices are actually slightly higher than they were a year ago. We also can see that winter months command higher prices, due to higher chances of shortages when natural gas usage is highest. Also, the shape of the winter 'hump', though at lower levels, is similar to a year ago. We also notice that currently all winters in the future are roughly priced the same, whereas a year ago, the nearer the winter, the higher the price.

WHAT A DIFFERENCE A MONTH MAKES

Click to enlarge.

What does this graph tell us? First of all, near month futures have dropped like a stone since August - from near $8 to $4.50ish. Also, the winter-summer premium has declined, not only in this coming winter (where supposedly Amaranth had their calendar spreads), but in all subsequent winters. Either there was some major hedge fund activity, or some energy traders talked to Al Gore. Curiously, in the face of this steep decline, back dated futures actually went up (the blue is higher than the brown in 2011)

WHAT A DIFFERENCE A WEEK MAKES

Click to enlarge.

Here we can see that in all years except for 2006, the majority of the winter-summer premium collapse of the last month came in the last week. (compare the brown-blue vs red-blue in the two graphs). However, this winters price differential had already collapsed, presumably earlier in the month, from about a $2.50 premium over spring to about $1.

If we believe the media reports of Amaranth losing $6 billion, how could they do that in natural gas calendar spreads? First of all, each natural gas futures contract is 10,000 million BTUs or 10 million cubic feet of gas - this means for each 1 point movement in price, the contract value changes by $10,000. So to lose $6B, one would have to have on 400,000 contracts if there was a $1.50 loss. However, the entire open interest of all the 2006-7 winter months is about 260,000 contracts and the entire open interest of every contract thru 2011 is 960,000 contracts. So either Amaranth had off balance sheet exposure (derivatives), they had things other than calendar spreads on (the actual front month contract declined almost $4), or something else was afoot.

Incidentally, if they did have 400,000 contracts, that would represent 4 trillion cubic feet, or about 20% of US annual natural gas consumption. Boy do energy and dollars make strange bedfellows...

AND FOR SOME PERSPECTIVE

Keep in mind that despite the dramatic fall in natural gas prices in the past year, when we compare the current futures strip to what it looked like 5 years ago, we see a) current prices are still much higher that they used to be and b) the winter 'humps', though still existent 5 years ago, were much smaller.

Click to enlarge.

CONCLUSIONS

We currently have a glut of natural gas. As scary as the future supply situation is, the fact is that even with a cold winter supplies will be adequate. Could another warm winter (it is an el Nino year) combined with no increase in storage capacity result in actual flaring of gas? Producers wouldn't allow this to happen of course, as at SOME price they will shut-in production and stop drilling new wells. In fact, today Baker Hughes announced their new weekly rig count, and the Canadians, always quick to reduce drilling on commodity price drops, had a 22% drop in rigs from last week. High prices gave us demand destruction. Low prices give us supply destruction.

Low prices, while currently pleasant, send the wrong long term signal to the alternative energy markets (like wind, tidal, solar, etc). Energy price volatility (in both directions) interrupts progress being made replacing fossil fuels with renewables. Low natural gas prices remove the motivation of utility providers to invest in alternatives. Low prices also prevent wind and solar entrepreneurs from being cost competitive, until the signal is too late. Furthermore, continued volatility will hamstring policymakers. A warm winter and everything is fine and a cold winter and people freeze in Michigan. As James Schlesinger, our nations first energy secretary said about energy "We have only two modes--complacency and panic." I can think of a third mode -schizophrenia due to alternating years of complacency and panic.

Towards this end, and this applies to crude oil as well, the ease with which the wall street crowd can impact the price of a commodity that is so ubiquitous in making our system work, combined with growing knowledge that fossil fuels are a one time subsidy given to humanity and are depleting rapidly, should alert policymakers to the importance of making immediate changes to current energy policy. In addition to position limits for non-users or hedgers of energy, we should create a floor price for oil and gas, so that financial market-led volatility or intermittent gluts of product do not derail the development of alternative forms of electricity and liquid fuels. The achilles heel of the big two fossil fuels in their use in our world, is the time it takes to replace them. The natural gas market, in its current price dichotomy, is a prime example of the high standard deviation potential in our current system. Heads everything is rosy. Tails there are power outages.

I have no idea whether it will be cold this winter.

*Note - Thanks to Art Smith of John S Herold and Co., Joann Arena at the New York Mercantile Exchange, Neal Elliot at ACEEE, and John Rowan at Johnson Rice for data that was used in this post.

A Closer Look at Oil Futures

Fossil fuels comprise the largest commodity markets on the planet. In a world facing an upcoming date when it will have used 50% of its oil (and natural gas), interest in energy futures will continue to increase. And, as energy becomes more precious vis-à-vis dollars, the activity in the futures markets, particularly for crude oil and natural gas, will have increasing impacts on society. Indeed, the amount of finite oil that can be financially controlled by a near infinite amount of money is enormous. The following is a basic primer on energy futures and will be one of several foundational posts linked to a longer upcoming story, "Peak Oil, Investments, and Diversification". I will outline the basics of an oil futures contract, and discuss the risks and rewards of investing in energy futures. The post will conclude with a discussion of the growing paradox between money and energy.

[break]

There have been numerous posts on The Oil Drum referencing crude oil futures markets (Peak Oil Contango?, Predicting Future Oil Prices). If Peak Oil is factual (which I completely believe it to be), then at some point the mainstream public will gravitate towards investments that benefit from long term higher oil prices. Crude oil futures may not be the simplest but are the most direct way to invest in this theme(if dollars are your goal)

INVESTING IN FUTURES

Before we get to the specifics of an oil futures contract, lets explain exactly what a generic futures contract is, and how one invests/speculates in one.

First, the difference between investment, speculation and gambling should be mentioned. Investment is a long term allocation of funds to something with a (perceived) positive rate of return. Speculation usually refers to a short term investment with a (perceived) positive rate of return. Gambling is allocating capital to something with a zero-sum or negative expected return. To spend capital on something that gets you a negative return implies there are other reasons for the decision (primarily maladaptive) which is a subject for another post.

Here is an excellent introduction to futures and forwards. Essentially, when one buys a futures contract on an exchange, one is entering into a legally binding contract to control the financial upside (and downside) of a product at a certain price and time. Futures markets are attractive to many because they offer often uncorrelated returns to conventional stocks and bonds and because the margin requirements are very low compared to traditional equity markets. Many commodities require 5% or less initial margin to enter into a futures position. (Crude oil is currently 6.7% margin ($4,725) for contracts expiring in 2006 and 4.8% margin ($3,850) for contracts expiring 2007-2012). With 5% margin a 10% move (in the right direction) will result not in a 10% return but in a 200% return on money invested. (Leveraged return =(100/Margin rate) x Nominal return). Of course, this leverage is a double edged sword as a move in the wrong direction results in sharp losses and a move below maintenance margin will result in a call from the broker representing the clearinghouse. If subsequent margin is not posted on a losing position, the clearing member can legally liquidate the position without the investors permission. The vast majority of players in the futures markets never take delivery of the product, but participate in the financial movement of the commodity until they close out their contract prior to expiration.

So, after one buys (or sells) a futures contract, it will eventually result in one of three outcomes:

1. the buyer will sell it at some point prior to expiration at a gain or a loss
   
2. if a margin call occurs and the client doesn't post required margin, the brokerage firm will liquidate the position, irrespective of profit or loss.
   
3. the contract will expire, and the buyer (seller) will take (make) delivery of the specified commodity.
   

CRUDE OIL FUTURES

(The grey box quotes are directly from the NYMEX website)

Crude oil is the world's most actively traded commodity, and the NYMEX Division light, sweet crude oil futures contract is the world's most liquid forum for crude oil trading, as well as the world's largest-volume futures contract trading on a physical commodity. Because of its excellent liquidity and price transparency, the contract is used as a principal international pricing benchmark.

The contract trades in units of 1,000 barrels, and the delivery point is Cushing, Oklahoma, which is also accessible to the international spot markets via pipelines. The contract provides for delivery of several grades of domestic and internationally traded foreign crudes, and serves the diverse needs of the physical market.

Light, sweet crudes are preferred by refiners because of their low sulfur content and relatively high yields of high-value products such as gasoline, diesel fuel, heating oil, and jet fuel.

Specific domestic crudes with 0.42% sulfur by weight or less, not less than 37° API gravity nor more than 42° API gravity. The following domestic crude streams are deliverable: West Texas Intermediate, Low Sweet Mix, New Mexican Sweet, North Texas Sweet, Oklahoma Sweet, South Texas Sweet.

Specific foreign crudes of not less than 34° API nor more than 42° API. The following foreign streams are deliverable: U.K. Brent and Forties, for which the seller shall receive a 30 cent per barrel discount below the final settlement price; Norwegian Oseberg Blend is delivered at a 55¢-per-barrel discount; Nigerian Bonny Light, Qua Iboe, and Colombian Cusiana are delivered at 15¢ premiums.

The contract is listed for 72 months.

As of Wednesday there was open interest of 1,130,596 contracts on the entire oil futures strip from Oct 2006 thru Dec 2012. At 1,000 barrels per contract this represents 1.1 billion barrels of notional oil, only about 12% of annual use for the US. (I admit a lack in html graphics ability, especially compared to The Oil Drum master)

As of this writing, front month oil is $69.19. The strip prices peak in Dec 2007 at $74.44 gradually declining to $66.30 in 2012.

INVESTING IN CRUDE OIL FUTURES

These are some of the more prominent reasons to invest in oil futures (in a Peak Oil world):

1. Oil, unlike other futures choices, is actually embedded in ALL commodities. It doesn't take sugar to deliver cocoa or frozen orange juice to plant soybeans. The pervasivness and non-substitutability (easily) of oil will eventually result in outsized price increases
   
2. The market does not recognize a)net energy, b)the important differences between (short term) flow and (long term) reserves or c)net exports. As these concepts permeate the investing public, it will result in new higher price floors.
   
3. Oil price spikes will likely be negatively correlated, or at least uncorrelated with other asset classes, so provide beneficial diversification.
   
4. All renewable sources of energy (wind, solar, biomass refining, etc) require oil to transport their goods and employees. Even if we seamlessly transition from a world of fossil fuels to one of renewables, we cant make windmills from wind or solar panels from sun. Oil will continue to increase in value.
   
5. We still are firmly entrenched in a neo-classical system that believes in perfect substitutes so 'hoarding' behavior is not yet being seen. Hoarding could occur at local, regional and national levels and once the concept of finiteness of oil is more widely understood, the hoarding aspect will represent another permanent increase in demand.
   

These are some of the more prominent risks associated with oil futures (in a Peak Oil world):

1. Since oil is priced at the marginal unit, demand destruction, even in the face of less future reserves, will result in price drops. Large exogenous shocks to the system, like bird flu or some other natural (or man-made) disaster could cause oil prices to drop precipitously.
   
2. Since oil is only storable to a point by end-users, a situation like the one above would preclude end users (that are aware of long term scarcity issues) from `hoarding' at the margin and prices could stay low until the economy recovered.
   
3. If oil prices go high enough, there is the risk of nationalization of the resources, rationing, windfall profits taxes on oil companies, all of which change the dynamics of the oil pricing market.
   
4. In a real collapse (New Orleans on a national scale due to a shortfall in production below the level needed to make the system work), money in futures in a brokerage account might be meaningless.
   
   

LABOR AND ENERGY

Since it is Labor Day weekend, it might be instructive to remind ourselves how much `labor power' fossil fuels in general and crude oil in specific provide for us. Here are some quick facts about US oil consumption and production. A closer look shows the US currently uses about 7.6 billion barrels per year. Given our current population of 300,000,000, this equates to over 25 barrels per person per year. Each barrel of oil has 5,800,000 BTUs. An average man working for 1 hour generates between 240-500 BTUS (this range assumes computer operators blended with construction workers). So one barrel of oil provides the latent energy of up to 25,000 hours of human labor, or 12.5 years working 40 hour weeks.

Using this estimate (and this is unadjusted for energy 'quality', e.g. it would be hard to get enough persons to push a semi-truck full of steel from Chicago to Denver.) So annually each American has at its disposal 300+ high quality oil slaves (and that's just the oil -if we include the natural gas and coal we're up to 57 boe which is 700+ energy slaves). We are receiving a massive labor subsidy due to fossil fuels.

One barrel of oil costs $70 and generates the energy of 12.5 years of human work. The average American wage is about $20 per hour so a business can pay someone for 3.5 hours of work for the same amount of money. In effect, we are printing money to buy the good stuff from countries that haven't yet expended their `energy armies'. (How long the world will continue to accept an abstraction for something finite and powerful is an open question, but something here seems awry. I humbly opine that this paradox between energy, labor and value will necessitate that neoclassical economics be replaced by a better model.)

ENERGY AND POPULATION

I believe there are 3 different definitions of Peak Oil and they will come in succession.

1. The point when we have used half of the oil that will ever be extracted.
   
2. The point when we reach maximum sustained production (given that we use high technology like horizontal drilling and water and nitrogen injection, we are likely borrowing from the second half of what was normally a bell shaped curve so this point will come later).
   
3. The point when the meme of finite energy resources takes hold in society.
   

For sake of this discussion, lets use the first definition, and assume we are roughly at Peak Oil now. We have used 1 trillion + barrels and have 1 trillion + left. But as discussed previously (exhaustively?), those 1 trillion barrels require a decent amount of energy to locate, harvest, refine, and distribute and this amount of `energy cost' subtracted from the gross is increasing.

Lets assume that the 1 trillion barrels nets out to 650 billion barrels to non-energy society. (Yes I chose this number specifically). Given our current world population, that equates to 100 barrels of net oil remaining for every person on the planet, (and leaves none for our children, grandchildren or subsequent generations). Any Tom, Dick or Rainwater for $4,000 can financially control 1000 barrels of oil in the futures markets, or 10 times his or her all time planetary allotment. Once Peak Oil version #3 is realized, there will be many investors clamoring to financially (or physically) control their 100 barrels, let alone 10,000 or 1,000,000 barrels. Can the futures markets absorb this? Will this make the Hunt Brothers cornering of the silver market seem like childsplay? The world uses 85 million barrels per day - and for a mere $340 million in margin, this entire amount can be controlled via the futures markets. Consider this in contrast to the $7+ Trillion invested or saved annually, and the nearly $100 trillion in stock and bond market assets. Will the market send the right signals? What smart angles will hedge funds take on this?

CONCLUDING THOUGHTS

Global society runs on a just-in-time inventory system. It cares about the current flow of products and assumes that shortages will trigger price increases which will in turn spur development of substitute products. Paradoxically, an awareness of future oil scarcity coupled with higher current flows would result in lower prices. Imagine if OPEC issued a press release that admitted their proven reserves were overstated but simultaneously announced that they had developed a new siphoning technology that would immediately bring 120 million barrels per day online. Would futures go up or down?? They would plummet as there would be more supply at the margin than people could use or store. Similarly, if OPEC announced a new trillion barrel oil find, but simultaneously initiated a reduction of the current flow rate to 50 million bpd, oil prices would spike even in the face of long term abundance.

What if Exxon announced they believed oil was going to $200+ per barrel and therefore had adopted a policy to shut down production and lay off workers so as to keep the oil in the ground until 2020 when it will be worth more? Their market capitalization would be decimated, as investors care about current quarterly and yearly earnings, which would now be near zero.

The market cares about the marginal barrel and immediate results. And that fact, in the opinion of this writer, is the achilles heel of modern society. Oil and natural gas are products that are largely non-discretionary in our world economy. They are unlike any other product in history in the % of human society that revolves around them. Long lead times are needed to create alternatives and restructure society around more local energy sources and smaller energy footprints. The high futures prices caused by production shortages or excessive financial ingress into commodities will slow economic activity, which will then reduce demand for oil and prices will plummet and overshoot on the downside. Then, when the economy next recovers, we will be further along the curve of depletion and prices will make new highs. This cycle of volatility will hamstring policymakers (and investors) as we will get mixed signals every 12-18 months until we are well past Peak when we will have permanently high oil prices.

The invisible hand moves from mouth to feed trough and back again, like a machine. Without market regulation, the hand will gorge its corpulent body, unaware that the upstream feedtrough appears to be narrowing. True to its origins, it will only react when its hungry, and as the Hirsch/Bezdek report pointed out, society needs 10-20 years to effectively prepare for a change in diet.

In conclusion, many are saying that the era of cheap energy is over but in the ways that count it is still here. At some point in the future, when net tradable global production is too small to quench societies thirst, $70 oil and $3 gasoline will be viewed as incredibly cheap.

A Net Energy Parable

Besides water, energy is the most important substance for life on the planet. For most organisms energy is embodied in the food they eat, be it bugs, nuts or gazelles. The excess of energy consumed to energy expended (net energy) has been integral in the evolution of the structure and form of present day organisms. Net energy is measured as how much energy is left over after the calories used to find, harvest, refine and utilize the original energy are accounted for. It is a term linked to physical principles and departs in many cases from our current market mechanism of valuing things by price. The alternative energy debate seems to have two firmly entrenched camps - those that acknowledge the importance of energy gain to our society and those who focus on gross energy, energy quality and dollars. This post explores what net energy is, why its important and how its principles may impact the future organization of our society.

[break] For most living things, energy is calories. Over eons, natural selection has optimized the most efficient methods for energy capture, transformation, and consumption.( Lotka) Cheetahs that repeatedly expend more energy chasing a gazelle than they receive from eating it will not incrementally survive to produce offspring.

But humans, in a very brief evolutionary time span, have puzzled out how to unlock the hydrocarbon bonds in fossil
fuels, freeing up vastly more energy that can be directly eaten. The vast majority of our per capita energy production is spent on non-nutritive exosomatic consumption. We have gradually, with rapidity at times, advanced modern human civilization to a global scale, with liquid fuel in jets, trucks, and automobiles providing the glue that links people and products together.

WHAT IS NET ENERGY?

To harness and consume energy requires some type of energy investment. This investment is what comprises the difference between gross energy and net energy. There is various nomenclature that describes this concept. Energy profit ratio, surplus energy, energy gain, EROI, and ERoEI all represent virtually the same relationship of how much energy we receive, relative to an energy input(dollars do not factor in). The most referenced metric in the Peak Oil literature is EROI or ERoEI (Energy Returned on Energy Invested), which, in its simplest sense is the ratio:

Energy Output / Energy Input

There is disagreement (sometimes dramatic) in the energy literature not only as to what should be included as energy inputs and outputs (a boundary issue) but how variables are included (how to evaluate co-products, how to include other limiting inputs to an energy technology, etc) These nuances will be covered in a subsequent post.

Net energy is typically given as per unit of energy invested. Thus:

EROI = Net Energy + 1.

(For those of you who've played craps - some tables pay off the hard-ways FOR one and others TO one. EROI and net energy have a similar relationship. EROI is how much energy output FOR an energy input and net energy is the energy output TO the energy input.)

Net energy also can refer to a sum as well as a ratio. For an ethanol process that has an EROI of 1.2:1 -the net energy is just .2, but we can also calculate how much net energy is created for society in a given year or a life-of-resource total. At EROI of 1.2, the 3.9 billion gallons that the US produced in 2005 required 3.29 billion gallons of BTU energy input, resulting in a `net energy' of 610 million gallons. (This post will use net energy and EROI interchangeably - if a sentence uses EROI, just subtract one to get net energy, if I use net energy, just add one to get EROI)

A GROSS vs NET ENERGY GRAPH

Briefly, the above graph shows a theoretical depletable resource which follows the 'best first' concept of resource extraction. The vertical axis is quantity and the horizontal is time. The gross energy resource "X", is the entire area under the curve. ("X" = "A"+"B"+"C"+"D"). Direct energy costs are "D". Indirect energy costs (like tractors and highways and medical insurance and such) are "C". Environmental externalities (in energy terms) are "B". "A" represents the total net energy of the resource after costs have been subtracted. At any given point in time the EROI can be calculated by taking a ratio of the total area divided by the costs (depending on the boundaries). As can be seen, net energy peaks and goes to zero way before the total gross energy is depleted.

ENERGY QUALITY

Energy quality is also relevant. From an economic standpoint, the value of a heat equivalent of a fuel is set by its price, energy density, physical scarcity, cleanliness of the fuel, capacity to do useful work, flexibility, safety, conversion aspects, etc. (1)

(Source - Neal Elliot - ACEEE)

Electricity is currently the highest quality energy we have in our society, largely due to its ability to do work. Although crude oil is of lower energy `quality' than electricity, its use is ubiquitous in allowing other segments of society to transport goods, etc. and its `quality' as measured by price, has been increasing relative to electricity in recent years.

Cutler Cleveland et al. devised one method of `quality correcting' the net energy of oil and gas extraction using, The Divisia Index, which accounts for energy quality of both inputs and outputs(1 )Below is a graphic of the the thermal and quality corrected EROI of US oil and gas extraction.

"The Divisia EROI is consistently much lower than the thermal equivalent EROI. The principal reason for this is the difference in the fuel mix, and hence fuel quality, between the numerator and denominator of the EROI. The outputs are the crude, unprocessed forms of oil and natural gas. The inputs are electricity and refined fuels such as gasoline and other distillate fuels. The latter are higher quality than the former, and have higher prices. Refined fuels and electricity are, therefore, weighted more heavily in the Divisia formulation."(1)

In the 1930s, US oil was easy to discover. In many cases it was almost at the surface and had an EROI of discovery of 100:1.(2). It has since declined, depending how one measures it or who one talks to, in the range of 10-15:1. As it gets deeper, harder to find, more viscous, higher sulfur content, etc, the EROI will continue to decline. A typical refining efficiency is about 10:1, so the total refined EROI of our precious liquid fuel is still between 5-10:1. This may not seem so high (compared to 100!), but how many stocks have you owned that make 500-1000%? On each iteration? This is the type of energy subsidy world society has become accustomed to.(My paucity of references for this segment gives evidence to how little concern our leadership has for the issue of net energy. Charles Hall, (with data from John S Herold and Co.) and others are working on new updated oil and gas EROI numbers - but solid energy data is either proprietary or difficult to assimilate)

WHY IS NET ENERGY IMPORTANT?

We all intuitively know the difference between net and gross - we use the concept everyday. If you make $100,000 per year in salary and the government takes 38%, your net is $62,000. If the government took 99%, it really wouldnt matter whether you made $100,000 or $1,000,000, your take home would be very small. The same concept applies to energy, and in particular, whatever energy source is most central to society. Basically, net energy matters because net energy is what we use.

"Energy gain, or EROI, varies with the quality (transformity) of a resource deposit and with the efficiency of the technology used to locate, extract, process, distribute and exploit the resource. As the ease of obtaining or using a resource declines, more energy must be devoted to these activities, causing energy gain to decline. Where an energy budget is substantially constant, allocating more resources to energy production reduces the amount of energy available for other activities. The potential impacts of such a situation on a human system include less leisure time, a lower standard of living, higher taxes, and an increase in childhood mortality. In an animal population, allocating greater effort to energy production may mean less winter fat, increased embryo resorption, lower birth weights, or the like.Tainter(3)

It is fundamentally impossible to maintain a constant level of net energy while the aggregate energy profit ratio drops. Only after the energy profit ratio and the need for new fuel related level off can net energy supplies return to the desired level (4).(This book, Beyond Oil, is 20 years old, but is probably the best book on the concepts of net energy, agriculture and society)

We are currently living in the highest energy gain era of any organism in the history of earth. Although the total amount of BTUs consumed in 2005 was higher than any year in history, world energy per capita peaked in 1979.(5)(One could argue that the plateau in net energy per capita has been maintained by a large wealth transfer from poor to rich, from future to present, and from abstract 'energy' (debt) to real consumption).

There are a finite amount of stored fossil fuels on the planet. Some of the largest, highest quality resources have already been exploited. The remaining resources are in many cases more energetically difficult to harvest, or have negative side effects (e.g climate change and coal).

"Environmental degradation is greater when the resource is of low quality and distributed but heavily used. Thus, a switch to renewable energy sources might bring, ironically, environmental damage comparable in scale to, or greater than, that caused by the use of fossil fuels." (Joseph Tainter)(2)

We already see evidence of this in some of the scaling of biofuel production in Asia

A NET ENERGY PARABLE

Net energy of corn ethanol examples and debates have been presented ad nauseum from both proponents and detractors. The redundancy is trivializing the concept. Though the ethanol debate is critically important in deciding how to deploy of our remaining fossil energy, what follows is a more benign example:

A civilization of 1000 sasquatches lives on a small distant Planet P. They require only food (energy) and water to live but also enjoy a vibrant culture with artisans, builders, and craftspeople. Sasquatches are vegetarians (as everyone knows) but do raise animals for labor help, namely Hephalumps. These animals help them harvest large hempy plants from the mountain near where they live and process them into Saspacks (the finest, sturdiest, durable backpacks in the universe). Each week (which is 10 days long, based on Planet P's sun), the sasquatch colony works very hard for five days and then has leisure time during for the next 5 days. Once a year, a ship from Planet X lands and trades luxury food items (non-caloric but tasty), medicine, comic books, and basic materials in exchange for an agreed upon cargo of Saspacks.

This societies only source of energy(calories) is Waybread, which is a highly energy dense cake made with Spice, water, and the meat from the Mongo nut, which grows in an enormous grove 25 miles from the sasquatch community. Once a Ten-Day, a troupe of the strongest 300 sasquatches traverses 25 miles to the Mongo nut groves, fills up their packs with nuts, and returns home with their energy bounty. It is a one day grueling journey across the Black Plains and through the Black Swamp but they make a ritual of it, telling stories and laughing most of the way until they arrive late at night. They spend a second day climbing trees and picking Mongo nuts, laughing at the colorful monkeys that play in the Mongo trees as well as picking some flowers to bring home to their wives and girlfriends. On the third day they leave at the crack of dawn and are home by nightfall. These same 300 sasquatches then spend two more days, cracking, pounding and combining ingredients together with the nuts to make Waybread; enough for the entire community for the next Ten-Day. All these sasquatches do no other work or leisure on the days they are procuring energy for the tribe. In return, they receive exalted status as the tribes energy providers, and a five day rest.

Since Sasquatches are freakin' huge, each member of their society consumes 4 m-cals a day. They really only require 3 m-cals to survive, but the extra makes them fat and hearty and also contributes to general gastronomic pleasure (sasquatches do not like to feel peckish). Hephalumps are even bigger and the 100 strong herd each requires 8 mcals per day of Waybread to survive and function. Although Waybread is highly nutritious, it is also highly perishable, and must be consumed within one Ten-Day, after which time it gets wormy, and gross.

During the five-day ritual of energy harvesting and preparation, 600 other tribal members are busy harvesting fiber from the mountain, and weaving and stitching it into Saspacks. The remaining 100 bigfoots, mostly youngsters, clean and maintain the village, manage the water supply from the river, and comb the hillsides for Spice. At the end of the fifth day, a feeling of joy emerges in the community as the tribe can look forward to relaxing, dancing and sleeping for five straight days, with plenty of Waybread for everyone. This routine has been going on for as long as any sasquatch can remember. None of them could imagine anything otherwise.

We can determine the energy gain (or net energy) of this society based on the above information. First let's look at the energy output:

Each of the 1000 sasquatches eats 4 mcals per day and there are 10 days per week on their planet. This equates to 40,000 mcals energy consumption per Ten-Day. Each of their herd of 100 Hephalumps requires 8 mcals per day (8,000 mcals per Ten-Day) Therefore the Mongo nut energy source provides them with a flow of energy of 48,000 mcals per Ten-Day. This is their energy output, which is entirely consumed.

How much energy does this society spend in order to get the 48,000 mcals? Well, 300 sasquatches work/travel for three days to acquire the Mongo nuts and then spend two days refining it into edible quality. They have to eat for nourishment during this time otherwise they would not have the strength to do work. Their caloric input (from the prior week's waybread) is 300 sasquatches times 5 days times 4mcals equals 6000mcals.

The energy gain for this society is 48,000 mcals less 6,000 mcals equals 42,000 mcals per ten-day.

The EROI is 48,000mcals/6,000mcals =8:1. The net energy is EROI-1 or 7:1. (Remember, EROI is FOR one and net energy is TO one.) For every unit of energy spent in energy harvesting/refining, 8 are produced. Since they used one unit to produce 8, 7 are left over for other areas of society. (Of the 48,000 mcals of energy available to their society, 6,000 is used for energy production, 12,000 is used to make Saspacks, 2,000 used for cleaning and water procurement, 8,000 to feed the Hephalumps and 20,000 to sustain the tribe during their 5 days of hedonistic leisure.) Sidenote -even though there is a 8:1 EROI, 30% of the tribes members contribute to energy procurement.

One day, the 300 energy procurers arrive at the Mongo grove and find many of the colorful monkeys lying dead on the ground. They were so disturbed that they carried 2 of the carcasses home to show the shaman. They also discovered that the Mongo nuts were no longer as easily reachable from the ground and they had to go either deeper into the forest, or climb higher up the trees to fill their packs with the largest ones. This ended up taking a whole extra day.

After returning home a day late, the community was in a panic. They would have to spend a day out of their Five-Day to finish the procurement of food! And the sight of the dead, dark colored monkeys made many sasquatches cry. It was decided to call an emergency Council, to determine what might be done about the turn of events. Many wise and respected sasquatches voiced their opinions. They were saddened by the dead monkeys, but they were more concerned about the lack of easy to find Mongo nuts - the implications being the 300 energy workers might have to work MORE than 5 days per Ten-Day. One of the senior males suggested "We could save a little time by not stopping to pick and bring home flowers which aren't really needed for our energy supply". A matriarchal sasquatch immediately stood up and chastised "Zeke-Stinky-foot, you come home without flowers and you'll see how much they are needed, Husband-mine!". There was a vote and it was decided to continue to pick and bring home flowers.

During much arguing and debating, the shaman entered the pavilion and everyone quieted down. He exclaimed "Colorful Monkey-friends die from Black poisoning" A sharp intake of breath from the Council-members. "Our energy providers feet put Black Desert and Black Swamp on Mongo trees while they pick nuts. Colorful-monkey friends get on paws then in mouth then die." The Council went into an uproar - Black poisoning! Because of our energy procuring! How awful! Yet what can we do? - We need the Mongo nuts to survive and have energy to work and sing! And if we go around the Black Desert and Black Swamp it will take an extra day in both directions!!" The sasquatches were very upset, and spent most of their Five-Day arguing and trying to make a new plan, where none had ever been needed before. It was decided by the Council to have the 300 workers spend an extra day at the groves to fill up their packs. The Shamans comment about the Black Desert being carried to the trees, and killing monkeys was only talked about by a few, and drowned out by the sasquatch leaders who really wanted at least 4 days of leisure and 4mcals per day. It was also decided to send 100 of the 600 saspack workers on exploratory missions, something that hadn't been done in generations, to see what was beyond a 25 mile radius of their community.

These plans worked out reasonably well and gradually the sasquatch colony adjusted. After all, they still had the same amount of food and energy, even though they had to work slightly harder for it, and produce a few less Saspacks. At the end of each Ten-Day the sasquatches were not quite as well rested, but were happy in their resolve to work a little harder to get energy for the tribe. (The Hephalumps did not notice any of this, and continued to chew their 8,000 mcal of Waybread per week.)

The phenomenon of `best-first' apparently applies to Mongo nuts as well as oil. We can now calculate an updated net energy for the sasquatch society. The energy production was the same, at 48,000 mcal per Ten-Day. But the 300 sasquatch energy team now worked 6 days per week requiring 4mcal per day or 7,200 mcal. Also, 100 workers spent 2 days per week (on average) exploring and looking for other Mongo nut sites. From a societal perspective, this `energy exploration' expenditure of 100*4*2=800 mcals should be included (somewhere) in any net energy calculations even though it didn't directly result (yet) in energy production.

The updated EROI formula is:

Energy output = 48,000 mcal/Energy input =8,000 mcal = EROI of 6:1 (net energy of 5:1)

Now of the 48,000 mcal of production, 8,000 is used for energy procuring, 11,200 is used for industry (Saspacks), 2000 for village maintenance, 8,000 for Hephalump food and 18,800 for leisure. Everyone in the sasquatch civilization still consumed the same amount of energy as before, but societies mix of labor allocation and free time had shifted.

***Sidebar of interest: We also now have information to calculate a more advanced (thorough) form of EROI, one that includes co-products and externalities. Flowers have value to sasquatch society and as such get a `co-product' credit in the EROI calculation. (much like dry distiller grains in the ethanol calculation) Since they are an additional output, we can reduce the amount of energy allocated to getting the Mongo nuts, as some of the sasquatch caloric expenditure is now considered necessary for getting flowers. How we allocate this is a debated but relevant question. We could take the market price of the two products (sasquatch society has none) or allocate by mass( the flowers have 50% of the mass of the Mongo nuts) or by volume (they are very light - only 10% the weight of nuts).

Allocating by mass would increase the EROI quite a bit:

Energy output = 48,000 mcal Energy input =4,000 mcal (4,000 allocated to flowers) = EROI of 12:1 (Net energy of 11:1)

Allocating by weight would increase the EROI slightly:

Energy output = 48,000 mcal /Energy input = 7,200 mcal (800 allocated to flowers) =EROI of 6.66:1 (Net energy of 5.66:1)

Our market system (in my opinion) underestimates the long term value of energy to society and net energy calculations that give so much `energy credit' to things like Dry Distiller Grains, thus overestimate the true energy gain (or underestimate the energy loss).

Regarding externalities, it is difficult to put an energy cost on dead monkeys. However, the poisoning was clearly a direct result of the sasquatches energy harvesting techniques and to exclude it from an energy analysis would not be holistic. Modern EROI analysis is just starting to value externalities as costs (see Patzek and Pimental regarding soil mining and Life Cycle analysis of GHG emissions) Ecological economics attempts to value things that humans need and value but are considered `free' in the market system. Quite possibly, the limiting factor of large scale ethanol production, even cellulosic, is the degradation of soil and assumption of continued ease and availability of irrigation.

Since sasquatches are a peaceful and conscientious race, lets arbitrarily allocate a high energy cost to the biodiversity loss to their culture of 8,000 mcals. The EROI would then be:

Energy output = 40,000 mcal (8,000 were subtracted) / 8,000 mcal energy input

=EROI of 5:1 (net energy of 4:1)

Continuing with our story:

The sasquatches situation, largely beyond their control, deteriorated further. The Mongo nut supply, while still enormous, was becoming more thinly distributed. Also, the nuts, which once averaged 3 lbs were now mostly 1-2 lbs. It took the sasquatches much more time and effort to pick and organize them. It also took more time to process them into Waybread, as the shell to nut ratio had increased substantially. All in all, it took an additional 100 sasquatches (400 total) a total of 7 days to harvest and process the Waybread. They were not beginning to get restive.

One day, while the stressed sasquatch community was hard at work on what was normally their 7th day (2nd of leisure), a troupe of youngsters came running full out into the village "We are saved! We are saved! - We found a new Mongo nut grove with huge nuts and plenty of them!! We'll soon be able to go back to our old routine of dancing and reading comic books! For a Five-Day! These nuts are huge!"

A Council was hastily convened where the youths were eagerly bombarded with questions: "How big was the grove? Were there colorful monkeys? Would you like some water? Have you met my daughter Fern-Blossom?" An old silver-back sasquatch, one of the tribal leaders, stood up and quietly asked "Sons, how far is this grove?" One of the scouts replied "Sir, its 120 miles on the other side of the mountain, but an easy walk, with no Black Swamp or Desert". The leader nodded: "That is 5 days in each direction. If we send our energy workers that far, there will not be enough time for them to process the Waybread upon their return." He paused, "However, our Mongo nuts close to the village are getting smaller. I think we should go harvest this new, bigger energy source you have discovered. We will have to take more of our Saspack workers and our village cleaners too. But you are right, you have saved us."

When everything was sorted out, the sasquatches had to organize 2 energy procurement teams of 375 sasquatches each. One team brought water from the village and met the other team halfway and then returned with the large Mongo nuts to process them. These teams traded off in their duties but worked 8 days total out of every Ten-Day. This left 200 sasquatches to work on the saspacks, and it was decided, to be fair and because they were behind contract, that they also work an eight-day. There were only 50 of the tribe left to work on cleaning, and basic village maintenance. The community was amazed that so much! of their time was spent making Waybread, just to spend it on making more Waybread - very little singing and relaxation time anymore. After a few months, the tribal leader, at a somber Council meeting, announced that everyone would have to cut back, and strict rationing of daily consumption to 3 mcals per sasquatch would be enforced.

Because of the reduction in Saspack labor time, the Hephalumps weren't all needed and some started to roam the village. A large controversy erupted when one of the energy workers, strained from a long ten-day on the road, hit a hephalump on the head and killed it. He wanted to eat it but didn't know how.

The energy gain of this society continued to decrease. The energy output of 48,000 mcal (before the rationing), had an energy input of 750 sasquatches times 4 mcal times 8 days = 24,000 mcals.

The EROI was 48,000 / 24,000 =2:1 (Net energy of 1).

A large portion (50%) of this societies efforts were now allocated to energy procurement. Of the total 48,000 mcals procured, 24,000 was from energy procurement, 8,000 was for their livestock, only (200*8*4mcal) =4,800 mcal devoted to Saspack production, and 1,200 to maintain the village and procure water and 10,000 mcals for leisure and art.

A further problem, (for which I dont plan to attempt the math) was that WATER, not energy was now a limiting factor in the energy harvesting process. Water was much heavier to carry than Waybread so a cache had to be set up midway between the water source and the Mongo nut source. The Energy Return on Energy Invested stood steady at 2:1, but the Energy Return on WATER Invested, was declining dramatically.

After the tribal decision to ration consumption, the energy gain of society upticked. Since each sasquatch only consumed 3 mcals, (and many noticed new clarity of thinking and vitality after initial grumbling), the energy production requirements tapered off a bit:

The tribe still procured the same amount of Waybread (the extra was allocated to the following weeks Mongo picking team). The energy input was now only 750 *3mcal *8days = 18,000 Mcals. Because of their belt tightening (or efficiency) the societal EROI increased to 48,000/18,000 = 2.66 (net energy 1.66).Note: the EROI of energy procuring didnt change, but the societal energy gain, from a Tainter-like perspective, did increase.

At year end, the spaceship landed from Planet X. (There were 14 female sasquatches, and one male, waiting at the landing port, hoping to be rescued.) The alien trader strode down the ships conveyor and frowned when he saw the somewhat disheveled sasquatch community. There were Hephalumps everywhere (a delicacy on his planet), huts and sidewalks were in disrepair, and the tribe looked thin.

He was greeted by the tribal leader who sheepishly stated "Noble trader, our energy supplies have dwindled and we had to spend extra time harvesting a new energy source so only had time to make 3,200 Saspacks, not the 6,000 per our agreement."

The alien snorted, "Silly sasquatches - your world, though small, is FULL of energy - what you call the Black Swamp is also known as crude oil and what you call Black Desert is called coal-both of these substances have way way more energy than your precious Mongo nuts. Since you are good customers, I will give you your materials and ½ the medicine but withhold the tasty treats and comic books until you can make more Saspacks. If you like, I will bring machinery to your planet and help you to harness your Black Swamp, in return for great riches" The community was saddened and confused. How could the Black Desert be strong energy? It was poison. They held an immediate Council and concluded that they could do without the comic books, materials and candy. The local shaman could find his own medicine, and they would continue harvesting Mongo nuts, but would further divide the labor among the tribe and produce Saspacks no more. They also didn't need the Hephalumps anymore and would lead them to the Mongo groves and leave them free next Ten-Day. They waved goodbye to the galactic trader for the last time.

The sasquatches were transitioning from a high to a low gain energy system. By removing the Hephalumps and the Saspack industry, which brought them niceties that they didn't really need, they now only had to procure 30,000 mcals per ten-day. The energy input was still 750 *3mcal*8days = 18,000 Mcals.

The final EROI in our example is 30,000 / 18,000 = 1.66:1 (Net energy of .66). While lower, the community now had reorganized in such a way that 18,000 mcal went to energy procurement and 12,000 were left for leisure and dancing and singing (40% of all energy).

CONCLUSIONS

Sasquatch civilization underwent a decline in net energy. The results were less industry and less free time, as a larger effort had to be made to procure essential food. Eventually, they partially offset this loss in energy gain, by jettisoning certain aspects of their culture that were energy intensive yet did not really provide the satisfaction that it cost. The situation of the Sasquatches is not that different from our own. Our assets are human ingenuity, 1.2 trillion barrels of oil, 179.8 trillion cubic meters of natural gas, and 909,064 million tones of coal (of various qualities)(source BP), and the various renewable flows generated from the planet. Our liabilities are a large population, the seemingly unquenchable human desire for more, a growing realization that we have in fact tapped the 'best-first' energy reserves, and ecosystems that are nearing the limits of their resilience to human extraction and waste absorption.

Our civilization is organized around high energy gain infrastructure - low gain sources, possibly even as low as 5:1 may not have the energy density required to power our liquid fuel intensive society. As can be seen by the below graphic, shopping centers and skyscrapers are part of a high energy infrastructure. Renewable flows, at least thus far do not match up in energy gain. Large scale wind has a higher EROI than oil, but cannot (as of yet), power our planes, trains and automobiles.

(Graphic from Cutler Clevelands EROI powerpoint.)

The corn ethanol and even the cellulosic ethanol debates typically miss a larger point. Much mental effort is spent debating whether the energy balance is slightly positive or slightly negative while society runs on an energy gain significantly higher than any liquid fuel alternative. When we hit $150 oil, there won’t be too many parents buying their kids a new GI Joe with the Kung Fu grip toy. At the same time, energy companies will need more and more employees to man wildcats and oil rigs and install solar panels. Though we might not be thinking in these terms at the time, the lack of energy gain (or lower net energy) will be manifesting itself in resources taken away from marginal areas of society (toy companies, hot tubs, hemorrhoid cream, Snausages, poker chips, etc) into energy producing and distributing sectors.

THE BOTTOM LINE:

1) Net energy is more important from a relative basis than absolute. A 3:1 EROI doesn't tell us much unless we know how that compares to what an organism/society has been built on/used to. A 2:1 EROI would have made stone age villagers incredibly rich. A 5:1 EROI may not be enough to power our society. (e.g. as fossil fuels get more expensive they will collapse the economy and no real recovery will ever happen as the high energy gain outputs are already gone)

2) Energy reserves are not as important as energy flow rates. We could have a billion mongo nut trees, but all that matters is the maximum flow that society is able to harvest in real time. (This obviously applies to oil as well)

3) Energy quality depends on the context. High BTU substances, like oil or coal, are clearly very useful to our society, but may not be to others. (the sasquatch colony valued and used Waybread, not oil)

4) Liebigs law of the minimum applies to an energy portfolio. Wind has a high EROI, but our system infrastructure relies on liquid fuels. The net energy of the weakest link matters more than the overall net energy of society. (Adding high EROI wind capacity while net energy of oil dwindles does not solve the problem, unless the energy mix changes from liquid fuels to electricity)

5) Using different boundaries in net energy analysis will lead to different conclusions. A society running at 5:1 EROI would be happy to develop a scalable technology with an 8:1 EROI, however, after environmental externalities are included, it might only be a 3:1 technology. (Coal-to-liquids and climate change comes to mind) The difficulties lie in making meaningful comparisons and valuing important life functions not priced in the market system.

6) Rather than pursuing the highest and most promising energy technologies, it might be prudent to pursue ones that are certain, and meet the net energy decline half-way by reducing energy footprints. As we decline in aggregate societal energy surplus, a great deal of remaining energy is going to be wasted, ostensibly going after 'more oil and gas', which will likely be unprofitable both monetarily and from energy perspective.

7) Since evolution has favored organisms that have the highest energy output energy input ratios, it will be a cognitive challenge for us (as organisms) to willingly reduce the numerator.

8) Consumption, in the sasquatch example, continued very high until late in the game, and was subsidized from borrowing from other aspects of society. Lack of energy gain was a phantom concept until the situation was much deteriorated. Similarly, in our current fiat based civilization, we might 'replace' the lower energy gain by printing money or relaxing financial requirements, but these measures will not be based on anything biophysical and make the eventual crash much steeper. In the end, it's not about how much energy we have but how much societies can afford via real inputs.

Our collective task will be to improve our net (total cost) energy from renewables while changing the infrastructure of society to best match what our long term sustainable energy gain can be.

(1) Net Energy from the Extraction of Oil and Gas in the United States. Cutler Cleveland, Boston University

(2)Hydrocarbons and the Evolution of Human Culture, Hall et al. Nature Novermber 20, 2003

(3)Resource Transitions and Energy Gain, Tainter et al. Conservation Ecology 2003

(4) Beyond Oil: The Threat to Food and Fuel in the Coming Decades, Gever et al, 1986 Ballinger Publishing

(5) The Olduvai Theory: Energy, Population and Civilization, Richard C Duncan, The Social Contract Winter 2005-2006