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Gail The Actuary (Gail Tverberg)

dspp
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Gail The Actuary (Gail Tverberg)

#181864

Postby dspp » November 21st, 2018, 10:27 am

Anybody who was around in the time of The Oil Drum (ToD) will remember Gail.

Here is Gail's latest: Why we get bad diagnoses for the world’s energy-economy problems
https://ourfiniteworld.com/2018/11/07/w ... t-page-29/

Fig 1 and Fig 2 certainly resonate with me. Economies ought not to be fragile & delicate at sub $100 oil and historically low interest rates. As usual Gail gets stuck into this from a systems thinker perspective, but (unfortunately) not drawing any new insights that I can see.

PS. This seems to be one of a series of blog posts that she is doing, teasing out aspects of her latest big presentation
https://gailtheactuary.files.wordpress. ... 6-2018.pdf

One interesting point she is making that I have not seen made so clearly recently is,
" China is in much worse shape than most people recognize because its coal supply seems to have passed peak production. This has happened because the cheap-to-extract coal is mostly depleted, making it unprofitable to increase coal production without significantly higher prices. Imported coal and natural gas are expensive options. China also has a serious debt problem."

regards, dspp

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Re: Gail The Actuary (Gail Tverberg)

#181891

Postby Nimrod103 » November 21st, 2018, 11:30 am

dspp wrote:Anybody who was around in the time of The Oil Drum (ToD) will remember Gail.

Here is Gail's latest: Why we get bad diagnoses for the world’s energy-economy problems
https://ourfiniteworld.com/2018/11/07/w ... t-page-29/

Fig 1 and Fig 2 certainly resonate with me. Economies ought not to be fragile & delicate at sub $100 oil and historically low interest rates. As usual Gail gets stuck into this from a systems thinker perspective, but (unfortunately) not drawing any new insights that I can see.

PS. This seems to be one of a series of blog posts that she is doing, teasing out aspects of her latest big presentation
https://gailtheactuary.files.wordpress. ... 6-2018.pdf

One interesting point she is making that I have not seen made so clearly recently is,
" China is in much worse shape than most people recognize because its coal supply seems to have passed peak production. This has happened because the cheap-to-extract coal is mostly depleted, making it unprofitable to increase coal production without significantly higher prices. Imported coal and natural gas are expensive options. China also has a serious debt problem."

regards, dspp


It is a pretty dense article which would take a week to do it justice, but I would start by questioning whether your comment is true:
Economies ought not to be fragile & delicate at sub $100 oil and historically low interest rates.
With the USA and UK apparently firing on all cylinders*, I am not convinced the Workld economy is fragile. Admittedly, there are problems with those countries which have borrowed in US$, and are now finding it tough to pay up, and in the EU area which encompasses countries which now use the wrong currency and are locked into a cycle of declining competitiveness. But I am not convinced that catastrophe is just around the corner.

Bringing my comments onto topic, the article appears to say that the World economy is struggling to grow with the current oil prices. IMHO this cannot be the case for Europe, where oil products are still very heavily taxed, and some of that revenue is used to subsidize renewable energy sources. EU governemnts could lower the price of energy in their economies tomorrow by lowering the tax take and abolishing subsidies.




*although full employment in the UK does not seem to be generating the GDP growth which is being achieved in the USA

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Re: Gail The Actuary (Gail Tverberg)

#181965

Postby dspp » November 21st, 2018, 4:10 pm

Nimrod103 wrote:
dspp wrote:Anybody who was around in the time of The Oil Drum (ToD) will remember Gail.

Here is Gail's latest: Why we get bad diagnoses for the world’s energy-economy problems
https://ourfiniteworld.com/2018/11/07/w ... t-page-29/

Fig 1 and Fig 2 certainly resonate with me. Economies ought not to be fragile & delicate at sub $100 oil and historically low interest rates. As usual Gail gets stuck into this from a systems thinker perspective, but (unfortunately) not drawing any new insights that I can see.

PS. This seems to be one of a series of blog posts that she is doing, teasing out aspects of her latest big presentation
https://gailtheactuary.files.wordpress. ... 6-2018.pdf

One interesting point she is making that I have not seen made so clearly recently is,
" China is in much worse shape than most people recognize because its coal supply seems to have passed peak production. This has happened because the cheap-to-extract coal is mostly depleted, making it unprofitable to increase coal production without significantly higher prices. Imported coal and natural gas are expensive options. China also has a serious debt problem."

regards, dspp


It is a pretty dense article which would take a week to do it justice, but I would start by questioning whether your comment is true:
Economies ought not to be fragile & delicate at sub $100 oil and historically low interest rates.
With the USA and UK apparently firing on all cylinders*, I am not convinced the Workld economy is fragile. Admittedly, there are problems with those countries which have borrowed in US$, and are now finding it tough to pay up, and in the EU area which encompasses countries which now use the wrong currency and are locked into a cycle of declining competitiveness. But I am not convinced that catastrophe is just around the corner.

Bringing my comments onto topic, the article appears to say that the World economy is struggling to grow with the current oil prices. IMHO this cannot be the case for Europe, where oil products are still very heavily taxed, and some of that revenue is used to subsidize renewable energy sources. EU governemnts could lower the price of energy in their economies tomorrow by lowering the tax take and abolishing subsidies.




*although full employment in the UK does not seem to be generating the GDP growth which is being achieved in the USA


Yes it certainly is a big read isn't it.

Re growth rates you do rather put your finger on it: the UK is a measly 1.5%, Eurozone at 1.7% and even US is only 3.0%. These numbers are trending down over the decades, despite rising debt that should have pulled growth forwards. Even Chinese growth is reducing sharply.

Re oil prices the reading I have done over the years has suggested that reducing oil product taxation simply moves the excess profits from the consumption country (OECD) to a the producer country (OPEC). This was one of the post '73 findings. The US in this respect is slightly atypical because it is both a producer and a consumer. That this is so can be seen over time by looking at US vs EU growth which are not that far apart https://www.statista.com/statistics/369 ... economies/.

regards, dspp

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Re: Gail The Actuary (Gail Tverberg)

#181986

Postby Nimrod103 » November 21st, 2018, 5:14 pm

It has long puzzled me as to why there are these big trends in interest rates through history, the most recent being the rise from WW2 to a peak in the early 1980s, and then a fairly steady decline since then. These trends apply throughout the World, and AFAIK have never been convincingly explained. It has occurred to me that the most recent may be related to the absolute cost of energy, which is a fundamental imput to prosperity and the cost/difficulty of doing business.

By 'absolute cost of energy', I don't mean the price of oil exactly, but the overall cost of finding it, getting it out and to market. The period from WW2 to the early 1980 was one when oil was abundant and cheap, came from big fields and cost little to recover. The price was only high between 1975-1984 because of OPEC, which ensured that much of the value of the oil went to the producers. However, that oil revenue was recycled into the World economy, so that despite the high price of oil, World business boomed. During this boom, interest rates rose to unprecedented levels to constrain what was basically runaway business prosperity.

Since the early 80s, oil has become much more expensive to find and produce, so the gross income is reduced, and business activity is becoming decreasingly profitable. And so interest rates have headed lower and lower. We have had a few years of $100 oil, coinciding with 300 year low interest rates. Business activity seems now to be picking up - US interest rates indicate a return to normality - and this is perhaps related to the decline in oil prices, but no new abundant sources of cheap energy have been found. IMV renewables are not cheap energy.

So the outlook to me is foggy, but there is not really any evidence of imminent catastrophe. Energy wont suddenly get cheap, so interest rates will remain very subdued, at least relative to the 1980s, because fundamental business profitability is under enormous pressure. And low interest rates keep the World economy rolling along, albeit slowly.

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Re: Gail The Actuary (Gail Tverberg)

#182234

Postby dspp » November 22nd, 2018, 10:10 am

Nimrod103 wrote:It has long puzzled me as to why there are these big trends in interest rates through history, the most recent being the rise from WW2 to a peak in the early 1980s, and then a fairly steady decline since then. These trends apply throughout the World, and AFAIK have never been convincingly explained. It has occurred to me that the most recent may be related to the absolute cost of energy, which is a fundamental imput to prosperity and the cost/difficulty of doing business.

By 'absolute cost of energy', I don't mean the price of oil exactly, but the overall cost of finding it, getting it out and to market. The period from WW2 to the early 1980 was one when oil was abundant and cheap, came from big fields and cost little to recover. The price was only high between 1975-1984 because of OPEC, which ensured that much of the value of the oil went to the producers. However, that oil revenue was recycled into the World economy, so that despite the high price of oil, World business boomed. During this boom, interest rates rose to unprecedented levels to constrain what was basically runaway business prosperity.

Since the early 80s, oil has become much more expensive to find and produce, so the gross income is reduced, and business activity is becoming decreasingly profitable. And so interest rates have headed lower and lower. We have had a few years of $100 oil, coinciding with 300 year low interest rates. Business activity seems now to be picking up - US interest rates indicate a return to normality - and this is perhaps related to the decline in oil prices, but no new abundant sources of cheap energy have been found. IMV renewables are not cheap energy.

So the outlook to me is foggy, but there is not really any evidence of imminent catastrophe. Energy wont suddenly get cheap, so interest rates will remain very subdued, at least relative to the 1980s, because fundamental business profitability is under enormous pressure. And low interest rates keep the World economy rolling along, albeit slowly.


Nimrod,

Your post above is very similar to many of the posts you would have found on ToD 15-20 years ago from any of the peak-oilers. I happen to think that they were directionally correct, though not necessarily on timing, or on what the transition phase would look like. I think we are in that transition phase personally but I don't know which way it will play out.

Anyway to pick one of the brethren, here is Art Berman (the shale guy), from slide 1 of http://www.artberman.com/wp-content/upl ... y-2018.pdf :
• Energy underpins natural systems
Ø Most people think that the economy is based on money. Money is nothing but a call on work-energy.
Ø Energy is the economy.
• There is nothing on earth like oil
Ø 1 barrel of oil = 5,700,000 BTU = 1,760 kWh: converted to work = 700kWh.
Ø 1 human = 0.6kWh/day of work 700/0.6 = 1167days: 4.5 YEARS OF HUMAN WORK.
• The world ran out of cheap oil 20 years ago
Ø Today’s WTI oil price $71.51 is 96% higher than the average constant dollar price from 1986-2004 of $36.58.
Ø That underlies most of the economic problems of today’s world.
Ø The working class has figured out that their lives are much worse today than 2 decades ago & that is why Donald Trump is President of the U.S.
Ø Few understand that American greatness lasted only 20 years after WWII & was a singular event.
• Technology does not create energy
Ø It is a spigot that allows access to energy.
Ø Debt has made things seem affordable by selling our energy future forward
Ø This led to the miracle of tight oil & shale gas.
Ø People want to believe: a few tweaks by politicians and better technology will make America great again.
• Climate change is real & resulted mainly from over-population.
• There are no easy solutions except conserving what we need for the future & learning to live with less.


Going back to your interest rate comment. We think of the interest rate as being the price of money. And, as Art points out, money is a call on value in the future, and most things of value are either energy, or embed substantial energy. So interest rates are a call on future energy.

Also we know that the bigger you are, the easier it is to be wrong for longer. If I overdraw the bank knocks on my door within a day. If the USA overdraws it just prints more money and everybody pretends not to notice for several decades. At the moment the world is collectively pretending that there is plenty of cheap energy available at any time.

Yet we know that the shale plays are only economic at $40-$60/bbl when combined with low interest rates. So if interest rates go up, then so does the shale break-even price. That is a consequence of the EROEI of shale recovery, i.e. it is reservoir engineering 101. And it is a Alice-in-Wonderland game because they are working out the good shale plays and that trend is only being partially disguised by improving technology trends. Since shale represents backstop oil, it is setting quite a high floor price for oil in the energy markets. i.e. I agree with Nimrod that oil is getting more expensive.

Before anyone jumps down my throat, let me also say that renewables are also expensive and for the same reason. They are now at parity (or slightly better) with oil & gas for generation purposes, when oil is at $60/bbl or so, when combined with low interest rates. Because, just as with a shale well, there is energy in to get energy out, and that cost must be paid in cash upfront, so interest rates matter just as much to renewables projects as to shale projects. The good news is that the EROI for wind & solar is better than the EROI for shale, and that the technology trend favours improvements for renewables. So too does the increasing reluctance to dump CO2 into the atmosphere.

At present, globally, renewables are the default for new generation capacity. The half-way point was passed about a year or so ago. It took maybe 20-years to get renewables technology to the point where half of new capacity builds is renewables, so we could reasonably assume that it will take another 20-years to get to the point where renewables are the overwhelming majority of new capacity builds. Since generation capacity tends to have a 40-year economic life (if they get a mid-life SLEP) that means that about 40-60 years from now the last conventional plant will go off the bars. (Long before that, the share price of the oil & gas companies will have cratered mind you).

Approximately one third of oil & gas goes into generation, one third to transportation, and one third to other uses. So let's look at transportation.

We are now getting to the point where battery storage is resulting in interesting vehicles, indeed very good vehicles as anyone who has sat in a Tesla will know. My opinion is that battery electric vehicles (BEV) are now roughly where wind & solar tech was in the late 90s, some 20-years ago. That is when serious adoption of wind & solar generation commenced. However a typical vehicle lifetime is only 14-years, not 40-years.

I think the constraint to adoption is at factory-level, not at buyer level (i.e. BEVs could reasonably command a premium for quite a while). There are about 70 mln cars made per year, and auto factories are typically 250k/yr - 500k/yr. So that means there are maybe 250 auto factories to convert over, combined with building the corresponding battery factories. Each duo is about a $5bln investment, so 250 x $5bln = $1,250 bln = $1.2 trln capex spread over maybe 20-years or so. To put that in perspective the market cap of the NYSE is $21 trln as of mid-2017, i.e. there is enough money if people allocate it to this. To put the renewables-for-generation journey into similar financial perspective, if you look at slide 99 of that deck I put up yesterday (https://cleanenergygrid.org/wp-content/ ... x-2018.pdf) they are proposing to spend $2trln on the US grid & generation infrastructure over a 15-year period, i.e. the numbers look in the right ballpark, and are doable.

But these are the numbers at low interest rates. Doing this at high interest rates gets a lot more difficult. Weaning any economy off the petroleum rung of the ladder is difficult. Again this has been discussed ad infinitum by the peak oil fraternity. Their view was that societies (planets !) only really get one run at this. And of course there is a last-mover advantage provided you are a big enough last-mover. Cue USA vs CN for the next 40-years.

So I think we agree, but not necessarily through the same thought pathways.

Personally picking the right moment to disinvest oil & gas and to invest in renewables is the crux, and I am expecting it to be a very messy journey in the market. What I am unsure about is how interest rates will respond. Directionally I tend to think it will be a long period of low growth as a lot of value will have to go into those transformations and not be available for other things. That in turn tends to suggest low interest rates, similar to depression era. And corresponding income inequalities (per https://gailtheactuary.files.wordpress. ... 6-2018.pdf slide 25). But there is plenty of scope for conflict and stress and other pathways.

regards, dspp

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Re: Gail The Actuary (Gail Tverberg)

#184597

Postby ap8889 » December 3rd, 2018, 11:51 pm

Great posts here.

As you mention, most of the insights are well known to the peak-oil fraternity, albeit not known by the general public.

Gail’s crucial piece of the jigsaw puzzle is linking the peak oil story to the wider financial system that enables or disables oil investment and sets POO.

It is clear that we will use all the oil we can extract. It is too useful. Where, how and when we expend the oil is one question, and the economics of extraction and recoverability are price dependent.

It looks like we are making some good decisions in the renewables field: spending some fossil to get renewable electricity is a rational trade that will help eke out the dwindling easy oil.

The scale of renewables is huge but the delivered electricity is still dwarfed by fossil sources. I really think we are in for a rocky ride if we think to keep high energy lifestyles in a windpower future.

Global warming is happening frighteningly fast and is the joker in the pack: we will likely have to divert energy products to mitigation of its effects sooner rather than later. Think extra fire trucks or wider fire-breaks in forestry, more aircon use, more intensive irrigation, crop shading in the tropics, disaster recovery, increased shipping loss rate and typhoons or flooding remodelling urban areas. How does it all play out? Not sure but I know it will need a lot of plastic and diesel to make happen.


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