Networked Resources, Declining Quality and the Peak Oil Argument.

Introduction.
The Peak Oil argument focuses on the question "How much oil?" We spend a lot of time discussing the exact inputs for Hubbert Linearization projections of URR, in order to calculate the moment of Peak Oil. Sadly, the question of “How much oil?" is a lot more complicated than it seems.

As I have said previously, theoretical discussions about oil reserves are pointless. In theory, the amount of oil available is an arbitrary number. Oil can be made from any organic source: coal, NG, biomass, or whatever. If enough energy is available, it can be made from CO2 and water.

This applies to ALL resources. Minerals can be extracted from sea water if access to energy is unconstrained.

Here is my point in what I will call a “thought bite”:
Resource constraints are about reserve QUALITY, not reserve QUANTITY.

Low quality is what is killing us, not low quantity. Alternately, we could argue that the constraint is low energy. If energy was cheap and unlimited, then recoverable resources would be unlimited. We need to look at the availability of oil within a networked system, not just as an isolated resource.

Liquids.
The fact that the word "liquids" is now being used instead of oil is frankly inconvenient to people who fly the Peak Oil banner. We typically conflate the two words by issuing a hand-waving argument that amounts to "When oil peaks, liquids will peak". But frankly this argument represents a chink in our armour - “unconventional oil" and all sorts of other non-oil liquids are now counted under the broad category of "liquids".

Synthetic and other manufactured liquids don't fit neatly into our Hubbert Linearization model. In fact, they will invalidate the model until such time as we can prove (not deliver hand-waving argument, PROVE) that production of these liquids is limited, irrelevant, or correlated with oil production). What we need to prove is that there is a practical limit to production of synthetic "liquids".

Many factors impact on this practical limit. In my last post at TOD I looked at the interactions that would ultimately limit production (http://anz.theoildrum.com/node/6974). I'm not sure I can put a provable numeric limit on production. Nor can I put a provable date on the Production Peak for liquids. But I can show that we have evidence that these points are either close or past.


A Different Way to Look At It.
Consider the situation here in Australia. We mine iron (and zinc, silver, aluminium, coal, NG, and lots of other stuff - but let's stick to considering iron).

Historically, it was quite possible to refine iron from very low quality sources. Vikings would smelt iron from a layer of iron-rich mud that got deposited as a layer in bogs and swamps (http://en.wikipedia.org/wiki/Bog_iron). This was a very energy-intensive process and consequently a sword was an item of great value - passed down from father to son.

However, when we started mining iron in Australia the ore was very pure. Steel could be made cheaply from our ore. As mining has continued in Australia we have consumed the high-quality ore and been forced to mine ores of lower quality – and even change to different types of ore.

At first this was not an issue. There is a simple mathematical reason for this. If your ore drops 1% in quality, from 90%pure to 89% pure then the increase in effort required to produce a given quantity of steel is negligible (around 1% extra energy required) - however the picture is very different at low ore qualities. If you drop 1% in quality from 2% pure to 1% pure ore then the amount of ore you must process to get the same amount of steel doubles. Consequently the energy required doubles (or near enough). Energy consumption required to process the ore increases geometrically as ore quality drops.

The energy required starts from almost negligible, initially rises very slowly, then passes through an inflection point, and from there rises at a frightening rate.




Similarly, we find that other factors are following a similar pattern to further complicating the extraction of resources. For example, depending on the resource, one or more of these is likely to be true:
- The amount of overburden that must be removed is constantly increasing
- The depth of the mine is constantly increasing, with associated complications
- Political/physical/geographical constraints are adding risk and difficulty
- The physical type of resource extracted is increasingly lower-quality (for example we now accept brown coal instead of anthracite and in place of free-flowing light sweet crude we now search for tar sands and oil shales).

This geometric increase in difficulty as quality declines is a well known relationship and not terribly controversial. However the consequence is dramatic. This raises an important question. How widespread is this phenomenon right now? How far along the geometric curve are we?

Where Are We?
To answer this, let us look at a range of both energy and non-energy resources:
1. Oil. We have gone from oil gushing from wells at energy returns of at least (estimated) 100:1 to oil that is manufactured by digging up tar-soaked sand and refining this using a series of energy and resource intensive processes for an energy return that is estimated to be in single digits.
2. Coal. When I was a boy at school we were taught that there were three main grades of coal: Anthracite, bituminous coal, and brown coal. Anthracite was the stuff we used and exported. Bituminous got used a bit inside Australia, but wasn't worth exporting. Brown coal was useless waste that you dug through to get to better grades. But then, when I was a kid I was also taught that the population of Earth is 2.3 Billion people. The situation now is that Australia’s production of anthracite is declining. Even brown coal is mined and exported.
3. Iron. Australia used to export high-grade hematite ore (96% of iron ore exports). Those days are drawing to a close. We now increasingly mine and export a different kind of ore - Magnetite. Magnetite is a chemically different and lower-grade ore that must be processed to increase its grade before it is shipped.
4. Other industrial metals. Silver is an interesting metal. Despite a dramatic increase in price, demand continues to rise, driven as much by its value as an industrial metal as by its status as a precious metal. We are producing more of it every year here in Australia. The attached graphic (of waste rock produced while mining silver) pretty much says it all.




I think that tells us where we are in the curve doesn't it?

So. To produce energy we are finding that we must invest a geometrically increasing amount of energy. Because of the increasing difficulty, we also need to invest a geometrically increasing amount of other resources (eg steel) which in turn requires a geometrically increasing amount of embedded energy to produce (mostly coal and oil).

Obviously this gets us into a positive-feedback loop. We need more energy in order to produce more energy.

Our Position.
So here is a recap of our position:
1. Historically our prosperity has been based on the fact that producing resources yielded more resources than it costs. This resource “profit” is a requirement for all other productivity. Our economy requires this profit. Ultimately, our society and our civilization are built on the simple fact that more energy and resources are produced than are consumed in the production process.
2. However the cost (expressed in terms of energy and resources) to produce energy and resources (which was previously relatively flat) is starting to rise geometrically, and there are positive feedback effects in place.
3. This will result in less "net resources" for our society and this trend will continue to worsen geometrically.
4. Our economy depends on a steadily expanding resource base. We are facing an ongoing decrease in net availability of resources. This will lead to a decline in the economy. This decline will have a knock-on positive feedback effect:

NOTE: My concern is that the progression is geometric. The problem is almost negligible until you hit the inflection point and then the curve goes vertical.

This progression will end when the geometric curve reaches the inflection point and starts to go vertical - because at that point the diminishing returns from energy will rapidly lead to a resource squeeze that will cause our society to go through some marked changes.

How would you know that you are approaching the inflection point? Here are some signs:
- Increasing resource/commodity costs. Oh dear.
- Since money is a proxy for the net resource "profit", if this "profit" starts to decline you would start to see financial problems. Again... oh dear.
- You would start to see graphs that "hockey stick" upwards. Such as the attached "waste rock.jpg".... Oh.... Dear.

Whoops.

My point reduced to a “thought bite”:
Economically recoverable resources in a good economy may be beyond the reach of a declining economy.

Conclusion.
.....So, to return to the original question - “How much oil do we have?" There are two answers:
1. In theory we can make arbitrary amounts of oil. So we have near-infinite quantities.
2. In practise at some point (probably within the next few decades) we will find that we can not even produce all the oil that is currently listed in "reserves" because this stuff is going to take more energy and resources to produce than we have readily available. Some of this oil may be produced gradually, in coming decades, but not at any significant production rate. The rest will stay as a reserve that is not commercially recoverable in a declining economic environment.

Some of the really “hard oil” may never be produced because the economy may not be able to put together the prodigious combination of energy and resources necessary to find and produce oil in impossibly difficult locations.

Oil and resources that are economically recoverable today may not be economically recoverable if the economy declines.

Discussions of Hubbert Linearization to produce URR and from there project an exact date for Peak Oil are interesting but no longer relevant. It is time to start preparing for a future that is not like the past.

I joined the Peak Oil movement so that we could mitigate the effects of PO and ensure a bright future for my children. I believe that we have passed an inflection point. That battle is lost.

The future will not be like the past. We must deal with multiple related and interacting problems - resource depletion, climate change, population overshoot, and resource contention. I don't think that the result will be "Mad Max", but it won't be "lawyers and accountants chatting over white picket fences in suburban bliss" either.

We need to move away from trying to define exact global URR. The problem is more complicated than that. It is a problem of quality not quantity. It is true that we have a problem of decreasing geological availability, but the problem presents itself in the form of declining quality squeezing us at the economic margins, not a problem of simple unavailability.

What To Do About It.
So the situation is worse than I thought. Simply staying where I am might not be the best solution.
I can plan to go down one of three possible paths – do I plan to:
1. Bug Out
2. Bug In, or
3. Build a Doomstead?
The answer is: If possible, I will prepare all three responses! Why? Because each will be the optimal action in a particular set of circumstances.
So let us review the possibilities and consider how they might be approached:
1. Bug Out.
To traditional survivalists this involves having a backpack ready and when the time comes you simply strap it on and “get out of dodge”. Usually there is some sort of plan or destination associated with the Bug Out strategy – though in some cases the plan is simply “I got me a gun. Anythin’ I need I can get with the gun.”

This plan might work in an apocalyptic future of Mutant Zombie Bikers (MZBs), but in the scenario of a slowly-developing crisis involving steadily-worsening economies, growing international tensions, slowly declining living standards, growing crime rates and increasing ethnic tensions, this simplistic plan doesn’t look like it will stack up well. I need bug-out plans that can cope with a sudden tsunami of Mutant Zombie Bikers, but also work for a slowly-emerging deterioration of day-to-day life.
To achieve this, the bug out plan could be a journey to a known destination or it could be that travelling is the plan - travelling as a sustainable lifestyle. Certainly Gypsies did it.

Numerous authors have commented that in times of dislocation the ability to move goods from where they are made to where they are needed is often a path to riches. Transportation is obviously the key. If we are assuming that fuel is hard to obtain, then having a viable form of transportation may mean that going on the road is a valid lifestyle choice. The Gypsy lifestyle or the life of a travelling tinker may be a future possibility.

Here are some transport options:
1. Campervan/caravan/etc. Pros: Comfortable and easy. Cons: You would need to keep a fuel cache somewhere. Petrol does not store well, so your vehicle would probably need to be diesel and you would probably need to have many hundreds of liters of diesel stockpiled. The cost of vehicle and stockpiled diesel will be significant.
2. Pushbike and tent. Pros: No fuel required and less up front expense. Bikes and bike trailers are sold at Kmart! Cons: Hard work. Slower. Your physical security may be more at risk.
3. Boat. Dmitry Orlov proposed this in a recent article (http://www.energybulletin.net/node/19396)
Pros: A sail boat provides you with a bed, stove, table, chairs, etc. You have the comfort of a campervan with the fuel use of a pushbike.
Cons: Most serious boats (the kind that stay in the water, not the kind that you move on a trailer) require constant maintenance. If I buy one I will have to put in the work and money to maintain it, even if I’m not using it. Dmitry Orlov lives on his boat, so this effort is justified. I have toddler-age children. Toddlers and water aren’t a good combination, so living aboard is not an option for me. If I don’t intend to live on the boat, and I don’t have money to throw away on maintaining a boat that I don’t live on, then some compromise may be required. A trailer sailor might be a reasonable compromise.

Of course a traveler may be more vulnerable and subject to threats, extortion or robbery than someone who simply chooses to stay home. This strategy is not without risks. The risks will depend on where you travel, how you travel, how prepared you are, and who you deal with.

Regardless of what form of transport I choose, ultimately a backpack is still a viable last recourse. In a worst-case scenario I still might need to walk to my destination.

So, in addressing the “How do I do it” question, I will need:
• Packs (24 hour pack and 72 hr pack)
• Bikes and bike trailer?
• A boat on a trailer?
• Some way of addressing the issues of water, food, shelter and physical security.
2. Bug In.
I have talked about this option in other posts, so I will just summarize the high points:
• If you are “Bugging In” (staying where you are during a crisis), you don’t need to lay in provisions for an indefinite stay – you only need enough provisions to last a few months longer than everyone else. At that point either the crisis ends, or everyone leaves, and you inherit the resources of the neighborhood.
• Since most people only have a few days worth of supplies in their pantry, and shops run just-in-time inventories with only a few more days of supplies, all I really need is 6 months of simple calories and a garden that grows some fruit and vegetables.
• Sadly, “Bugging In” is not always an option. Fire, flood, war and civil conflict are just some of the things that might force me to Bug Out.

Addressing the “How to” question - for "bug in" I will need:
1. Enough calories for 6 months.
2. Access to a garden with fresh fruit and vegetables.
3. Some way of addressing the issues of water, waste management and physical security.

3. Build A Doomstead.
I am not a rich man. But I am a fairly well-paid professional who does not smoke, gamble, entertain expensive women, or otherwise fritter away money. My wife is equally boring, so we normally finish the week with a little extra money. I would like to spend my excess money on a swimming pool and nice holidays. But I’m starting to think that I need to spend the money on a “Holiday Home” that could double as a Doomstead. I can tell you that I would far prefer the nice holiday in Cairns or Fiji, but we don’t always get the future we want do we?

So I have started the process of:
1. Selecting a site
2. Building a doomstead (Off grid)
3. Stocking the Doomstead with enough stuff to create a nucleus community.
4. Identifying people that I would like to share it with.

Each of these tasks deserves a post – so more on each later.

The Step-Wise Descent Scenario

I am trying to put together a coherent account of my thoughts behind an ongoing cyclical downturn. Here it is in a nutshell:
1. Starting in around 2004 oil production reached a plateau, and a decline in energy availability (due to declining EROEI and declining energy availability per person) reduced per capita global economic production.
2. Hank Paulson and other officials in charge of monetary policy around the world failed to understand the root cause of the GDP decline and attempted to address it by increasing liquidity, in the expectation that increased liquidity would lead to increased production. Unfortunately, there was no way to provide an increased oil supply in order to support an increase in production of real, tangible goods. The liquidity had to go somewhere so this liquidity created a market for illusory production, and was absorbed by the phantom "production" of financial vehicles, such as CDOs, SIVs, CDSs, etc.
3. The economic decline really kicked in when the unreality of the financial "products" was unmasked. When the market started valuing these products at what they were worth hundreds of billions of dollars simply vanished, and the economy started to decline to the level of our real productivity.
4. Unfortunately, this economic decline reduced activity and thus reduced energy consumption, masking the problem - which is our reduction in per capita energy availability.
5. However the recent economic decline didn't just reduce energy consumption - it limited investment in energy exploration and production, thus undermining our ability to produce energy over the next few years. This, in conjunction with natural decline rates and a gradual economic rebound will soon lead to another round of energy insufficiency.
6. This next round of reduced energy availability per capita will further decrease per capita economic production and lead to another economic step down.


Where does it end? I have said before that markets are about perception. It ends when the magnitude of the problem is perceived by enough people. What happens then? In my view, people will act to protect their own interests. There will be winners and losers.