I generally don’t like to talk much about the real world on this blog, but I have had an interest in the energy sector for almost as long as my interest in virtual worlds.  I wouldn’t bother, but between the nuclear crisis in Japan, the revolutions happening in oil exporting nations like Libya and Bahrain, and the recent sudden rise (again) of fuel prices, it seems like it is important to say something.

The energy crisis popularly known as “peak oil” has been talked about for decades, but only recently has the International Energy Administration (IEA) come right out and said it is already a reality.  “Crude oil” peaked in 2005, and all liquid fuels (85% of which is oil) will peak in 2012 if it hasn’t already done so in 2008.  Because liquid fuel is necessary for transportation, it means transportation is going to get harder and/or more expensive.

Many will dismiss “peak oil” by saying that there is still plenty of fuel available to go around, which is true.  The problem is not a function of “amount”, it is a problem of “growth”.  Every year there will be less and less fuel available for our economy to use, and because of this the economy is more likely to shrink (enter a recession or worse a new Great Depression) in the near future, and there is nothing anyone from any political party can do about it.

This is probably the most important story the mainstream media is completely failing to talk about.

My simple explanation is in the chart above.  This chart is unscientific (notice the lack of actual values on the x and y axis), it is merely an illustration of what I believe to be our current energy situation.

On the X axis we have cost, and on the Y we have energy production. It seems logical that the best source of energy is in the top left corner of the chart. This is energy of the “and then one day shooting at some food, and up from the ground comes a bubbling crude (oil that is, black gold, texas tea).  Once upon a time oil gushed from the ground, thus requiring no work to obtain it.

Well that oil is gone now, decades ago. So we start moving down, the cheap less productive stuff, and/or to the right, the more expensive but productive stuff, until that is exhausted.  The lighter and lighter colored semi-circles show the progression of our use of energy.  As time goes, we continue to move further and further down and to the right.

The thing is there are limits to how far down and how far to the right we can move.

The hardest limit is the red line at the bottom: EROEI = 1. If it takes more energy to produce the energy it is a waste of time. Lately some conservatives have been passing a stat that America has 10 times the oil that Saudi Arabia has in the form of shale oil. What they do not bother to mention is that to get a barrel of oil out of shale, it would require 2 or 3 barrels of oil worth of energy. That’s an EROEI of 0.3, way below minimum. Another popular “alternative” is Hydrogen. The problem there is that the primary source of hydrogen is water, and as every basic chemistry student knows, the energy needed to unlock hydrogen from water exceeds the amount you can get from the actual hydrogen.  We can create a car that runs on hydrogen, but it will always be more efficient to just get an electric car.

Other limits are it has to be profitable (green line). This line may change as energy prices vary. Sometimes when prices go up, once unprofitable energy sources suddenly become profitable. That is why solar and wind projects are suddenly picking up. They weren’t profitable enough in the cheap oil days.

Then there are capitalization costs (blue line) which represents the  limit lenders and investors are willing to spend on a project. This is the #1 problem with nuclear power. It is not the safety concerns, it is the fact that it takes 30 years to become profitable, when you consider both construction costs and takedown costs, and nuclear plants average around a 40 year life span. To find someone to invest 15 billion dollars with that little amount of profit is extremely difficult, which is why all nuclear plants are government subsidized.

Then there is the last line: costs exceed economic limits (purple line). People are mentioning the possibility of oil reaching $200 a barrel. Oil at that price is economically unsustainable. The share of energy costs in our economy is around 8%. When energy costs exceed that, it cuts into growth. Energy costs kill economic growth. Want proof? 3 out of the last 4 major recessions in the last 40 years were preceded by record energy costs. The exception to the rule was the dotcom bust of 2000.

The worrisome aspect is that our primary sources of new oil, like Canadian oil sand, and deep water drilling, require prices to be around $80 a gallon just to be profitable, which is pushing us over the 8% limit.  The airline industry, which is highly dependent on liquid fuel, loses money when the price goes above $85.

On the chart I point out all the popular answers to our current energy crisis and their approximate position on the production vs cost scale.  As you can see all of these new energy technologies push against at least one of these four limits. We have pretty much exhausted all of the cheap and productive sources of energy.

Our only choice now is renewables. One renewable source, hydroelectric, accounts for almost 20% of our electricity, but unfortunately all the hydroelectric dams that can be built, have already been built.   Geothermal is another renewable source, but it has not been fully exploited yet, accounting for only about 1% of our electricity.  It also runs into the same problem as hydroelectric in that there are limited places where a geothermal plant can succeed. The other renewables: Photovoltaic solar, solar thermal, wave power and wind power, amount to around 1% combined, but growing. We had better start investing quickly, or soon we will have to get by with only 22% of the energy we currently have.

Then there is the transportation problem, 95% of which is done with oil and oil products. Food production requires oil too, a lot of it. When oil prices go up so do food prices. We can find ways to cut back on travel, we can’t cut back on eating.  Transportation is going to have to go electric, and for long distance that means trains on electrified rails, in which the US has none, and which the GOP is opposed to building.  Planes cannot reliably  run on electricity, at least not big passenger jets, so until the solar powered blimp can be scaled up to hold 200 passengers, the airline travel era may soon end.

What I see happening is energy and energy costs driving the US and all other OECD countries into a new Great Depression, this one without any chance for recovery due to lack of resources. The US is the country least prepared to deal with this as we have put all our chips on oil for energy and cars for transport, and suburbs for housing so people have to drive to work.  The $100 a barrel oil will cause another major recession, not that we have even recovered from the last one.

Videos on Peak oil can be found here.   The best website for all energy topics (and the source for most of the above info) http://www.theoildrum.com/