A Diesel Powered Civilization

Part 2: Coping with a difficult reality

Photo by Nicolas Arnold on Unsplash

Diesel fuel is the linchpin of civilization. From agriculture to mining all kinds of minerals, or from transportation to construction, its continued supply is essential to maintain current consumption and population levels. And not only that. It enables the harvesting of all other energy resources from coal to natural gas, or from wind and solar to nuclear. Perhaps its no exaggeration to say, that without diesel fuel the gigantic Ponzi scheme of our ever increasing global energy use would simply collapse. No wonder every effort is made to keep diesel fuel production high, or to find a replacement. Ecological and climate costs aside, is this possible at all? What are the proposed measures floating around in the media? And what if growth required a level of energy investment we could no longer afford? (If you haven’t done so, please read the first part of this article to gain further understanding of the background of the topics I’m discussing here.)

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Why don’t we just make more diesel?

While the question seems obvious, the answer is not. After all, refineries could make so much more money on diesel: over the past five years the premium paid after middle distillates (diesel and jet fuel) was consistently and significantly higher than what a refinery got after selling gasoline (a light distillate). For a visual representation, just take a look at this chart. Except for the summer of 2021, when travel restrictions were lifted, but industrial and transport demand did not return yet, one could’ve achieved a much higher profit on middle distillates than gasoline. Now, if there is consistently more money to be made on diesel, why don’t refineries make more? I mean what’s not to like in higher profits?

The answer is simple: because it costs more. A lot more. Converting other, heavier fuels into diesel via hydrocracking involves hydrogen gas, high pressures in the range of 80–200 bar and temperatures between 300–450°C. In other words: lot’s of energy. And you probably already know it by heart: energy is the economy. Especially when it comes to the oil business. Thus above a certain rate the idea of making more diesel fuel becomes self-defeating, the energy cost of doing so would eradicate even the heftiest of margins. Besides such a move would increase demand for heavy crude and hydrogen (made from natural gas), thereby increasing input costs even further.

Drill, baby, drill — or wait, rather not

OK, then let’s take a look at oil extraction. High prices beget high production, right? Well, no. Actually, it looks like prices are still not high enough to do that, at least not for the Gulf states… You see it’s not only the cost of extraction what needs to be covered, but the costs of the enormous welfare benefits and construction projects, too. Saudi Arabia thus needs an oil price of $96.20 per barrel to balance its books, which is much higher than the $70 level we are at (at the time of writing). So what do they do then? Stop investments in vanity projects, like building a linear city or creating a ski-paradise in the middle of the desert? No, they milk the cash-cow instead, and rather push Saudi Aramco (the world’s largest oil producer) into a net debt position, than to give up on anything. How sustainable this approach is on the long run, is yet to be seen… For now it should not come as a surprise then that — in an attempt to limit supply on the market and keep prices up somewhat — OPEC further delays the rollback of production cuts.

‘Hah! Then we will drill for more shale in the U.S.!’ While the idea looks tempting (climate disaster be damned), reality looks rather different. According to Standard Chartered American oil output won’t surge under the next administration either. Instead, ’Drill, Baby, Drill’ hits a wall of capital restraint. According to Matthew Bernstein, Senior Analyst, Upstream Research at Rystad Energy:

“The industry’s shift towards prioritizing shareholder returns and long-term growth through acquisitions has led to a more disciplined approach to investment. This means that even if prices rise, companies are unlikely to significantly increase spending, as production has somewhat decoupled from oil and gas prices. As a result, the traditional link between high prices and increased drilling activity has been weakened, with companies instead focusing on maintaining capital discipline and maximizing returns.”

Smead Capital president Cole Smead added some further details:

“If the Trump administration opens up federal leases for oil and gas, Federal lands would get 25% per barrel of revenues. You will have a lot of trouble finding an oil company that can make money at $52.50 per barrel with what they have left from a $70 barrel.”

The shale revolution is over. Just like the Saudi miracle it, too, has entered its cash cow phase, where investments are limited to mergers and where all eyes are on maximizing shareholder returns — before the party inevitably ends. If oil prices go up in the meantime, then more will be left for stock buybacks or buying up additional smaller players. If not, then cost cutting will deliver profits. And if all else fails, bankruptcies will be declared and shops will be closed — marking an end to a once profitable business. Again, there is nothing new in this, history books are full of examples. As the saying goes:

“Everything that has a beginning must have an end”

Deep sea to the rescue

Then what about offshore oil? According to a recent article in the Financial Times offshore and deep sea oil is making a big comeback, thanks to efficiency gains and an uptick in investments. Over the past couple of years the industry significantly increased automation and made most engineering operations possible from a remote control hub, reducing the headcount of onboard crews to a third. (Moving people in and out of an oil rig, providing accommodation, food etc. is one of the biggest cost factors in an offshore platform’s life.) Drilling platforms, too, have been taken back down to bare bones, resulting in smaller leaner structures. The average cost of developing deepwater fields has thus almost halved over the past decade from around $14/barrel to $8/barrel. These fields also produce large volumes right after production start, and thereby provide a short payback period, so what’s not to like?

Before we indulge ourselves in fantasies of AI driven, solar powered, fully automated rigs circling the oceans like giant mosquitos, there are other factors to be considered. All this new oil comes at the cost of 7–8% decline rates (vs the average 4–5 percent). This means that production is halved within 9 short years, inferring that significant new exploration is needed just to keep extraction flat. Discoveries, on the other hand, are lagging behind: the rate of finding new oil is already far below the actual consumption rate for decades now. We are adding around 11 billion barrels per year to global oil reserves on average versus the 30 billion barrels of liquids consumed every year. In 2022 and 2023 notably, oil companies have discovered 5 billion barrels only, replacing a mere sixth of what has been consumed during those years. And as large oil fields deplete, these discoveries mean smaller and smaller, fast depleting pockets of oil both on land and out at sea. 

When it comes to drilling for more oil we are running the Red Queen race, thinking that if we could drill more holes faster and cheaper we could prevail.

This approach is not without risk, however. The energy demand and material investment — together with the risk of a catastrophic failure — grows with every meter of depth reached. I don’t know about you, Dear Reader, but when I read that companies across the globe from China to India are „Willing to drill to ridiculous depths in the pursuit of energy security” I don’t get that warm fuzzy feeling that things are going the right direction. Boring an exponentially increasing number of holes deeper and deeper into Earth’s crust — often through thousands of meters of water — comes with pressures and temperatures rarely experienced throughout normal operations. Another major accident is thus not a question of if, but rather a question of when… Especially when regulators, instead of regulating, act as mere facilitators in the process. Even if you disregard ecological consequences, the 2010 Deepwater Horizon disaster in the Gulf of Mexico cost $65 billion for BP to mitigate. Should another such accident occur, an increase in insurance cost could easily make deep sea drilling impossible to continue.

The curse of low prices

Historically speaking, oil is not terribly expensive. The current (November, 2024) WTI oil price of $69/barrel equals to $50 twelve years ago, which is exactly half the amount crude used to cost back then (Brent was hovering around $100/barrel in 2012). Another example: the price of crude was around $34/barrel in November, 2000, which equals to 62 in today’s dollars. Compare that to $69 earlier this month and try to maintain the view that oil is expensive today.

Crude Oil Prices — 70 Year Historical Chart. Prices were adjusted for inflation. If you consider that inflation was consistently higher than officially reported, past prices (in today’s dollars) are even higher than shown on the chart.

‘Then why isn’t there more demand for it?’— one might ask. What has changed since the 2000’s when China was on the rise and the US was at the peak of its power, is that demand has started to disappear. (And no, not because of electrification.) Put more bluntly: we have reached the edge of the Petri-dish, both physically and financially, and there is no more place to go. Citing Tim Morgan from Surplus Energy Economics:

But real GDP was only $9.5tn higher in 2023 than it had been back in 2003. This means that each dollar of private and public borrowing yielded only $0.27 in growth. This number falls to $0.16 if, in addition to debt, we also include expansion in those broader financial assets which are the liabilities of government, households and PNFCs (private non-financial corporations).

Over the past half a century while incomes stagnated (at best), expenses (debt service, energy, healthcare, education, housing, food, etc.) just kept rising. Consequently, people and companies alike had less and less money to spend on investments, gadgets, travel, and other non-essential products — all mined and delivered on the backs of middle distillates. This is why diesel fuel demand per capita just keeps falling year after year. So while — in theory at least — we could dig up and refine more oil into transportation fuel, demand would still not return.

As crazy as it may sound, as oil depletes it could continue to get cheaper and cheaper, effectively killing any hope of future production growth.

The relentless increase in the energy investment needed to get the next unit of oil, gas or electricity simply ate up all the efficiency gains made by the economy so far. This has led to a situation where producers would either need to find fantastic amounts of cheap easy-to-get oil fast, or have to get much higher prices for their products in order to continue with business as usual. As we have seen, however, neither of this is happening as Earth’s resources proved to be finite and consumers need lower and lower prices to match their shrinking budgets. This is why Rystad energy sees $55 per barrel realistic in 2030, in other words: record low price levels in real dollars, not seen since the 1990’s. This figure — should it come true — would be fully in line with their most probable scenario for oil depletion, leading to a worldwide production peak in 2030, then a subsequent fall to a half of that peak figure in 2050.

LNG to the rescue

‘But who needs oil anyway? We can make liquid fuels from natural gas as well! Yeah, that will do the trick!’ Let’s turn to liquefied natural gas then. On the face of it, replacing diesel with LNG is a no-brainier: according to IRU, the world road transport organization, 1 liter of diesel (weighing 0.83 kg/l) is equivalent to 0.93kg of LNG, even after taking all differences in engine design and energy density into account. LNG trucks increasingly look like a viable option. For proof look no further than China, whose economy is already investing heavily in EV-s and LNG trucks to compensate for the lack of affordable diesel. What’s the catch then?

Electricity production by source, China measured in terawatt-hours. Source

Well, let’s take a look at a recent report titled Global LNG Outlook 2024–2028, written by The Institute for Energy Economics and Financial Analysis. According to the paper’s authors: “Lackluster demand growth combined with a massive wave of new export capacity is poised to send global liquefied natural gas (LNG) markets into oversupply within two years.” Now which is it? The problem with Chinese demand is that it is rather price sensitive, and sudden price spikes (due to cold snaps, or another bout of sanctions) could derail return-on-investment calculations for truckers switching to LNG rather quickly. No wonder why China has remained cautious so far. They have kept their electric grid powered mostly by coal and hydro; not letting the share of natural gas generation grow as high as in the West. Energy security, for them it seems, is not just a catchphrase. LNG is a rather volatile market, and as the case of Europe testifies, betting your entire economy on it is not a wise move, to say the least.

Beside being the world’s largest producer, the U.S. is also the globe’s biggest natural gas consumer. It’s gas companies thus needed to find a lucrative way to get rid of the surplus; a problem they had since at least the middle of the 2010’s. (If you still have questions as to why Europe had to give up cheap pipeline gas, or who won the most from sanctions and blowing up gas infrastructure, look no further for an answer.) The problem is, that the world cannot afford to pay much more for LNG than it did for pipeline gas. Just the energy cost of making LNG alone equals 8% of the energy contained in the gas going into a liquefaction plant, to which transportation and storage adds another 2–3%. We are talking about a 10% premium at best, without considering all the energy going into building special ships, liquefaction plants and terminals from untold tons of steel made by burning untold amounts of coal. (And don’t get me started on paying back huge bank loans, or shelling out millions for dividends and for astronomical CEO salary packages.)

European wholesale natural gas prices in EUR/MWh. For comparison with US prices: 50 EUR/MWh roughly equals 14 USD/mmBTU (depending on the exchange rate). Compare this to a Henry hub price of 3 USD/mmBTU as of November, 2024. Source

Remember, a couple percentage points can throw the delicate energy balance of any economy off kilter, so this sudden 10% surcharge, combined with a lack of infrastructure and bottlenecks was a sure killer. And while bottlenecks eased over time, the energy required to continue with business as usual will not. Europe has thus found itself in a trap with expensive LNG, which, combined with intermittent “renewables”, virtually guarantees high energy prices and a permanent loss of competitiveness for the foreseeable future. “Clean” LNG regulations — mandating the use of low emissions standards only a few US LNG plants can meet — locks the old continent into this rather unfavorable situation even more firmly. (Again, strict regulation is very much needed to avoid methane leakage, but not when applied selectively.) As a result the global energy production and transport system has just become a whole lot more complex and energy intensive to maintain, stymieing the last hopes of economic growth. Hence the tepid demand forecast by the Global LNG Outlook report.

Another problem with natural gas that it’s nowhere more infinite than oil. Proved natural gas reserves worldwide are on a flat plateau since 2011, inferring that we have added just as much as we have consumed. At least on paper. In reality, however, just like with the trickery with oil reserve figures, this meant pure technical revisions and data cosmetics to keep stock valuations high and the general public calm. This is not a sustainable situation. Take America, the world’s largest producer and consumer of natural gas for example. Under current circumstances the U.S. has 12 years left till it consumes all of its proven reserves, which corresponds to 5% of global stocks. Given that this is a finite, non-growing amount, a peak in natural gas production must happen somewhere along the line. No one, not even the smartest of shale companies can produce gas (nor oil) at a maximum flow rate till the very end. Earth’s physics dictate that well before total depletion arrives there must come an inflection from growth to decline. And this is what we might be seeing already. 

Almost 80% of natural gas in the U.S. comes as associated gas from fast depleting tight oil wells and shale gas plays, which are also prone to rapid depletion. Just as we have seen with deepwater oil, we would have to run faster and faster to make up for lost production. But how long can that continue? Well, due to the curse of low prices (3 USD/mmBTU as of November, 2024), American natural gas extraction has already started to fall. Replacing fast depleting wells means drilling, drilling and more drilling, which costs more money than such low prices could justify. Several operators have thus already shut in natural gas production in reaction, and intend to continue curtailments in the second half of 2024. If this trend holds for the remainder of 2024, it would mark the first annual decrease in U.S. shale gas production since 2000.

Here, again, just like with oil, opening up more land does not help at all, as it would lower prices further still, making investment into future production even less desirable for gas companies. Rest assured, I’m not visioning a sudden drop in neither U.S. nor world gas production, but reaching a high plateau instead. For now. If economic conditions keep deteriorating, though (which is highly likely in a steadily worsening energy return on investment scenario), this brief plateau could easily give way to a more or less permanent decline. Make no mistake, this is great news for ecosystems and the climate alike, but less so for billions of people fed by natural gas derived fertilizers. Replacing diesel fuel with LNG can only accelerate this process. Something which is great for producers on the short term, but given the limited nature of this resource, it could ultimately end up making things worse faster and sooner.

“Alternative” Energy and Coal

Those who read my articles carefully, might already know what comes next. There are no alternative energy sources. Yes, fossil fuels are polluting, are wrecking the climate and are finite. On the other hand, they make all other so called “alternatives” (like nuclear, hydro, renewables, hydrogen etc.) possible via mining ores, smelting metals and making concrete at scale. Sorry, but “renewables” are everything but. These energy harvesting machines are made out of finite reserves of metals — and sit on pillars of steel erected on giant concrete slabs made with coal and delivered by diesel trucks. None of these activities could be made by “renewable” energy at scale. The same goes to nuclear, which as Gail Tverberg wrote recently has (many) hidden problems, none of which can be solved by advanced modular units. There are a thousand good reasons why nuclear did not fulfill the hopes pinned on it, and why it remained a tiny contributor to world energy production. (Remember, electricity is but a mere 20% of all energy civilization consumes, the rest comes from internal combustion (diesel, gasoline) engines and most importantly: process heat needed to melt glass, smelt metals and to make concrete.)

Now add in the fact, that “renewables” produce highly intermittent, weather dependent electricity, and the picture becomes full. Europe has just got a taste of this new reality with the annual return of the Dunkelflaute — the dark doldrums, when neither the wind, nor the Sun can generate enough electricity. If natural gas is so much limited, will this mean the return of coal then? Hardly. The best reserves have been already scraped, and most of what remains is low grade brown coal, which is totally unsuitable for metallurgy, and only mildly suitable for generating electricity. Is it any wonder, that the world is already on a plateau of coal consumption since 2011 measured in the energy produced? (Don’t look at tons mined, it is irrelevant and only proves the point that we are returning less and less energy per ton, year after year.)

Global coal consumption measured in terawatt-hours, or the amount of (heat) energy produced. Source

Then what about biofuels, synfuels, or hydrogen? Well, for starters, we are well past peak arable land, meaning that we can no longer grow food production, let alone diverting a considerable amount of it to making fuels. (Which, by the way would be done by diesel powered machinery, and natural gas derived fertilizers anyway.) Synfuels and hydrogen are deeply net energy negative, meaning that there is much more energy going into them, than what could be returned. Such fuels would require oil and gas prices in the multiple hundreds to be “competitive”, which on the other hand would sure to wreck the economy. 

We are facing an affordability crisis, ushered in by a worsening energy return on investment, not a lack of ideas.

Conclusion

Globalization fueled by neoliberal economics, communism, fascism all proved to be failed experiments when it came to managing a massive growth in surplus energy. Now, at the tail end of global economic growth, none of these systems has an answer what to do next. None of their advocates understand that we have entered the final phase of modernity either. As we have seen above, all of this civilization’s power sources depend on each other, and as they slowly turn net energy negative and peak one-by-one, the gigantic energy Ponzi will start to unravel. First gradually, then suddenly. 

Opening up federal lands for drilling, or turning the seafloor into Swiss cheese oozing oil into the ocean, is not a solution to our net energy dilemma. The world economy can no longer afford oil the way it used to do twenty years ago. As Gail Tverberg observed, we have found ourselves in an affordability trap: oil and gas has simultaneously become too cheap for drillers to continue drilling for, and too expensive for customers to keep on buying in ever larger quantities — despite falling prices. On the other hand, we need more oil than ever just to stay in place. We would desperately need to replace lost / old infrastructure, keep up with mineral depletion, power an ever more complex economy with AI, Bitcoin in an accelerating pace — all at the same time — even as we run out of cheap oil and gas. All this based on financial claims (stocks, bonds, derivatives etc.) for which we have absolutely no cover in real material and energy terms. If this is not a perfect recipe for a crash, nothing is.

Apart from nuclear war — towards which we are marching with frightening speed — nothing can put an end to the accelerating decline in affordable energy and resources. If we survive into the 2030’s without having to endure a nuclear holocaust, and following a peak in energy production, we will be faced with a contracting economy, a fall in both production and consumption. Lacking adequate energy supplies the world economy will be completely split into two: a rapidly declining West, and a struggling global majority. In the meantime all sorts of measures will be implemented to mitigate the fall in energy production / consumption, but lacking a miracle none of it will succeed. The laws of thermodynamics dictate that once the global economy starts to require more energy to maintain itself, than what it could produce (and pay for), it must begin contracting. We have to face the stark reality of our civilization turning into a post-industrial, scavenger economy. Lacking accessible, high energy return fossil fuels and minerals, there is no return to the heydays of modernity either. Once decline sets in it won’t (can’t) stop till it hits rock bottom: humanity once again will have to learn to live without electricity, manufacturing and global supply chains.

Recalibration23 study Once we hit peak industrial output (red line) it won’t stop till it hits rock bottom by the end of this century (according to current estimates). The proximate cause: energy and resource depletion (pink curve) hitting an inflection around half of global reserves used up. Source

This is our new reality we have to deal with. I know it sounds dire, and involves terrible losses, but it is what it is. There is still a lot to be done, though. For starters, preventing nuclear war — at all costs — should be the number one priority for all nations, starting immediately. Then a realistic assessment needs to be made, globally, on how much oil and gas we actually have at a cost affordable to the economy. Every nation has to develop a protocol then, spanning multiple decades, on how to shut down modernity — safely. No blathering about “de-growth”, an “energy transition” or “steady state economies”. These are fairy tales for children. Instead, we need a completely new financial and trading system facilitating the long gradual shut down of the world economy. Think in terms of hospice, not in terms of an elective surgery. Such a system must be based on real commodities, real ecosystem health indexes, real stocks and real flows of real energy, real materials and real nutrients; completely replacing our current arrangements based on a hallucination people call ‘money’.

We must come to the realization that we won’t be able to feed 8 billion humans and at the same time maintain a massive technosphere on a dwindling amount of fossil fuels and mineral resources. Thus a triage must be set up to evaluate which technologies must be left behind immediately (such as AI and crypto currencies), on the short to mid-term (most consumer goods), and on the long run (basically everything but agriculture and food transport). The protocol must prioritize feeding and caring for people in balance with the health of ecosystems — not to satisfy the demands of corporations. If this requires a radically new form of government, then be it. Unless you see measures on this scale and magnitude, you are witnessing business as usual: the accelerating collapse of modernity.

Beholden to corporate power and being dead-set against shrinking the economy, no government on Earth would embark on such a journey on its own volition, though. The coming unraveling of our global energy production system could, however, rearrange the deck chairs so radically, that plans like these might suddenly start to look desirable. In an irony of ironies, if we don’t wipe ourselves out with nuclear war, and manage to figure out a replacement system for sorting out our finances in a contracting economy with a shrinking world population, we might easily find ourselves in a temporary overabundance of energy and materials, again. (Albeit on an ever hotter planet.) None of this guarantees the survival of modernity. Energy and resource depletion won’t stop just because we decided to be good from now on. Industrial civilization was an anomaly, and will leave the scene no matter what we do. The only question is how? Will it end in a bright white flash, dragging the rest of the biosphere with it? Or will it come to an end with a silent whimper, allowing life to continue? These are the questions of our time.

Until next time,

B

Notes:

Capitalism is like evolution: it “works” on the long run, but it doesn’t guarantee the survival of any individual or company, nor the human race for that matter. Left to it’s own devices, just like evolution, it will most probably produce a classic ‘release’ phase on its way down, known from the adaptive cycle of ecological systems. A trend towards male infertility (caused by endocrine disrupting chemical pollution), could actually help alleviate the pain somewhat, but only if we find a way to stop it somewhere along the way.

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