The Great Simplification with Nate Hagens - Energy Blindness | Frankly #3

Episode Date: June 21, 2022

Nate explains how our culture is "energy blind" and the implications. The YouTube video, featuring charts and graphs, of this podcast is available now: https://www.youtube.com/watch?v=mVjhb8Nu1Sk For Show Notes and Transcript visit: https://www.thegreatsimplification.com/frankly-original/frankly-03-energy-blindness  

Our culture is energy blind. I've been increasingly using this term to describe how our politicians, our media, our universities neglect the fundamental importance of energy in our lives, our expectations, and our future trajectory. So I would like to take this 20, 30 minute riff to describe what I mean by energy blindness. So let's just start with a 15-second clip from a recent movie we made, and I hope you can all watch the entire 30-minute film. But here's 15 seconds from the end of it. To our ancestors, the benefits from carbon energy would have appeared indistinguishable from magic.

And instead of appreciating this giant one-time windfall, we develop stories that our newfound well-time well-term, health and progress had emerged purely from human ingenuity. We had become energy blind. So what does this mean energy blindness? So first of all, everything in nature that moves or requires effort first requires calories. And it's no different in human systems. Every single aspect of our society, every product, every service that results, every service that results in GDP first requires an energy conversion.

So there's no exception to that, no matter what good contributes to our GDP, it required energy to develop, to create, to run, to maintain, to deliver, to dispose of, all aspects of our entire economic system are moving things around and they require energy. We have everyday things think about in your own house. The average American house has 40 items that are constantly plugged in as a drain on power. That by the way, those 40 things that are plugged in all the time use 12 to 15% of our electricity. You plug them in and they're just plugged in overnight.

draining, like your toaster, your computers when you're not using them, et cetera. So we swim in a sea of energy use like a fish swims in water, and we're largely unaware of it. The benefits we get from energy are pretty much on human timescales, indistinguishable from magic, given how much and how high quality the energy we get from fossil carbon and hydrocarbons. A barrel of oil is 5.7 million BTUs worth of energy potential, translated into work potential at 1760 kilowatt hours. In contrast, a healthy human worker generates around 0.6 kilowatt hours worth of of work, physical work in one day.

So depending on the boundaries of analysis, how efficient humans are, how much waste heat there is, a barrel of oil does 11 years of human work, but humans are more efficient. So I've done the math and it works out to around four to five years of human labor is replaced by one barrel of oil, which costs right now $110. Anyone, any economist, any grade school college student can look this up and find it on the internet. This is not controversial. What's controversial, of course, is the contribution that energy makes to our societies. I have an MBA from the University of Chicago with honors. Three of my professors there subsequently won Nobel Prizes, they were energy blind.

I know this sounds hubristic, but the word energy as a contributor to the market development, the market efficiency, the productivity of our world, our wealth was never mentioned. Why? Because we've been growing our energy supply, our access to buried sunlight. throughout our entire lifetime. So economists and financially minded people look at what's happened in this unique period of human history as if it were normal when really what we're doing is finance is layered on top of ecology and energy. And we are drawing down the principle of our main input.

to our economies and treating it in our stories, in our media, in our universities, as if it were interest. So how much does this impact our economy? We use around 30-odd billion barrels of oil per year. And if you translate how much coal and natural gas we use per year, it works out to about 100 billion barrel of oil equivalents of fossil carbon and hydrocarbons every year added to the human economies. At four to five years of human labor per barrel, that's around 500 billion human labor equivalents added to our economy with five billion real workers. So all we've had to do is pay for the cost to extract this from the ground. That's what economists look at.

How much does it cost us to extract it? We don't include the tens of millions of years of creating the resource, nor of the pollution streams are not included in our prices. So what this has done is this giant windfall of fossil energy added to human economies has boosted our wages, it's boosted corporate profits, it's reduced the price of stuff that we order and it's delivered the next day in a little brown truck. It's increased our population and it's dramatically increased our per capita consumption in the world. So the average American today, and by American, I mean United States, consumes around 17 barrels of oil per year in

our footprint. And if you add coal and natural gas, it's around 57 barrel of oil equivalence. The average American uses 3,100 pounds of coal per year. But that's not all because we import stuff that's made from other countries, particularly China. So if we add up how much energy is embodied in the goods that were created in China, but consumed here, it's another 7,000, barrels of oil. So we use around 72 barrel of oil per person per year in the United States. And this has made us pretty much materially richer than kings and queens of old. So the scale of this is gargantuan. And we take it for granted because every year we seem to have a little bit more in the world. But of course, there's more people. And so we're largely, we're largely.

I'm largely blind to this. We think of the world in terms of technology and in terms of money. But as my friend and he will be a podcast guest next week, Steve Keene likes to say that labor without energy is a corpse. And technology without energy is a sculpture. And I add to that and say a city without energy is a museum. powers everything. Well, what's the problem? We have all this energy and we invent technology and things are getting better. Well, the problem is, is this stuff, we are drawing it down 10 million times faster than it was geologically sequestered. So it truly is a bank account that we are inherited and are burning through it as if a 10-year-old would burn through his inheritance on video games or such. The global conventional oil, the high-quality oil, has been on a plateau

for around 15 years. The only reason that oil production in the world increased was because, in the United States, because of access to debt, both from oil companies accessing Wall Street debt and from central banks putting in artificially low interest rates and other access to quantitative easing to make oil and things more affordable, we went to shale oil, and so we boosted global oil production temporarily. Right now, it looks like oil probably pears, deeply in production in late 2018. And what's happening is the United States, Saudi Arabia and Russia, the three largest oil producers in the world.

I don't have accurate up-to-date details on Russia and Saudi Arabia, but the United States, we've drilled and used all the good stuff. now almost half of our oil is light, tight oil, or shale oil. This is the source rock where all the other oil originated from, migrated from these deposits. And what we've done with fracking technology is we've widened the size of the straw to access the same amount of oil. So it looks like there's plenty of liquid coming out at the top of the straw, and there is, but we're much closer to that slurping sound near the end.

After tight oil is gone, there's nothing left after that. And right now, if we were to stop drilling for environmental reasons, for lack of capital, for complexity reasons, our oil production in the United States would drop 40% the first year, and around 22% the next year, and around 17% the year after that. because the existing fields deplete much more rapidly than they did 10 years ago, 20 years ago, 50 years ago. So we have to drill more and more and drill faster in order to maintain our production. The United States produces around 11 or 12 million barrels of oil a day and we consume around 20 million. So as much oil as we're producing, we're still a net oil importer.

which is why President Biden is going to Saudi Arabia next week. If you look at a 600-mile triangle around Riyadh, Saudi Arabia, 60 to 65 percent of all the remaining oil in the world is within this 600-mile triangle, which is why Biden is going to Saudi Arabia and not Buenos Aires or Tasmania, et cetera. So, oil really underpins the wealth of nations. If you look at a logarithmic chart of oil consumption per country and GDP per country, it's almost a .96R squared. Oil currently is the economy.

So the other thing we are energy blind about is this issue of energy quality. People naturally think that, oh, a BTU of energy or a jewel of energy of one type is equal to another type. But there's huge quality differentials in energy. First of all, there's the spatial distribution of energy. The United States had a geographic birthright or a geologic birthright of being this place where many ancient oceans resided, where the phytoplankton from prior eons was condensed and refined into liquid hydrocarbons. The United States has used more oil in the last 20 years, in the last 50 years, in the last 200 years, than any other country on Earth, partially because of where the United States resides as a geological province and partially because we have the world's reserve currency so we can print money and buy other people's oil.

But a lot of people are talking about renewable energy. And I am pro-renewable energy, although I tend to refer to it as rebuildable energy because it takes a lot of materials and energy and infrastructure and complexity to build. And we need to rebuild it again in 25 years. But most renewable energy only produces electricity. And electricity is only around 20% of the energy we use globally. So, first of all, we can't just turn all the non-electric things into electricity. There's heat, there's transportation, there's heavy bunker fuel, there's aviation. So there's that issue.

Then there's the intermittence issue, which is what Germany is struggling with right now, among other things. You can't just build more solar and wind when you need natural gas when the wind doesn't blow and the sun doesn't shine. So right now, Russia has reduced, as of this morning, this is June 17th, has reduced its natural gas flows to Germany by 25% from a couple months ago. As it stands now, especially with the Freeport explosion, limiting LNG shipments from the U.S. to Russia, Germany will not be able to fill its natural gas storage into the winter. So they are already advising people and companies to reduce consumption, to turn off thermostats, to turn down air conditioning in the summer.

Many, many businesses are going to fail in Germany and in Europe and in the United States, for that matter. Because what we've done is we've built a civilization around an expectation even a naive expectation because we didn't understand the impact that energy has on our society of cheap energy going forward. And why is the price of energy so important? First of all, is energy is embedded in every single aspect of our cultural system. And all of the minerals and materials that go into products also need energy to mine, refine, deliver. But what ends up happening is the Industrial Revolution is a story of humans adding thousands or tens of thousands

of units of energy to tasks that humans used to do manually. So we do that at a horribly inefficient energy payoff. But a hugely, since we extracted close to no cost, a hugely economic and time benefit. So monetarily and time-wise, we're getting huge benefits from a huge waste of energy that we're adding thousands of units to each process. But what ends up happening is if fossil carbon, well, if any energy gets more costly, since we've leveraged the replacement of human labor with fossil workers, the benefits we get decline rapidly when prices go up. And right now, Germany and Europe are becoming less energy blind because of what the Russia

and Ukraine situation. So getting back to my point on energy quality, there are lots of different aspects of energy that we can't just plug and play one type of energy for another. And I have to say, and I'll unpack this more on a future podcast, our administration is saying some unbelievably energy delusional statements. Gina McCarthy is now threatening wanting Google and Facebook and the social media companies to crack down on anyone being critical of renewable energy. Okay?

So I don't want to be critical of renewable energy. We need to go to renewable energy, but we're not going to power the same goods and services today with renewable energy and even with a... combination of declining fossil fuels and renewable energy. We're going to have to change our system. So where do you draw the line on Gene and McCarthy saying we can't be critical of renewable energy? Do we not talk about population? Do we not talk about ecology? Do we not talk about overshoot? I mean, that's worrisome. But also, Energy Secretary Jennifer Granholm and Biden blaming our energy costs increase on Putin, you know, trying to tell oil companies there's a windfall tax because

you guys are making too much money. But by the way, we're not going to want your fuels in the future so don't invest into refining capacity, et cetera, is just the amount of energy ignorance is appalling to me, which is why I like to use the word energy blindness. We're blind to what energy does for our culture. So another aspect is complexity. So a barrel of oil has 42 gallons in it. Around 40% of that is gasoline. The rest is diesel fuel, heating oil, jet fuel, bunker fuel, really heavy tar-like stuff that they make asphalt and roads out of. But there's like 6,000 products that come from a barrel of oil. So there's this naivist. out there that if we somehow build electric cars, that we won't need oil anymore. But gasoline is just one of the

components that come from a barrel of oil. There's medicines and petrochemicals and plastics and all kinds of surgical devices and tents and football helmets and condoms and all kinds of things come from a barrel of oil. Yes, it's true. We can use bamboo or some renewable crops to replace some of these things. things. But again, it has a cost and the higher cost means less benefits for humans. So why are we energy blind? To me, energy blindness stems from ecology blindness. We don't teach about trophic pyramids and stocks and flows and the importance of energy in nature. So energy blindness is a subset of ecology blindness. And I think we probably need to be teaching about this much earlier in our school system.

We need to teach great school kids, K through 12, about ecology and energy. We have kind of wasted the first half to two thirds of our oil inheritance. And I think it's really important that people start to appreciate. recognize value and plan for a different energy future than we have. And I think what's happened with Russia and Ukraine this morning, Putin is talking about the fact that the unipolar world is over. And so the energy that they were exporting to Europe, they're now sending to India and China.

So at any time, I expect that the model. monetary claims that we create every year, 95% of our money comes from commercial banks making loans to credit worthy borrowers. This is all predicated on a growth-based system, but it's all based on having more and affordable energy every year. And so my thesis is that we're headed for a great simplification. And that is when we have a recalibration with our monetary claims. claims with our underlying productive energy and material capacity to support and maintain them.

There are countries that are really going to face this sooner than the U.S., probably. Japan right now imports almost all of their energy. They have had their government support stock and bond purchases for the last 20-odd years. They have a stated cap where the JGB interest rate on the jet. Japanese government bonds is capped at 0.25%. And so the Japanese government buys bonds from the general public in order to maintain that cap. Meanwhile, the yen continues to decline. And so Japan is a perfect microcosm of where the real world runs on energy and materials,

and they are creating monetary overlays that cannot be supported in the long run. I think what happened in Ukraine is going to dramatically change the power structure within Europe, especially within Germany, especially the satellite nations like Italy. Italy's government bonds are 60 basis point above U.S. treasuries. Italy also has to import all of its energy at higher and higher costs. As of this morning, Friday, June 17th, natural gas is, is the equivalent of $240 a barrel in Europe. And that's the market price in the futures. That doesn't include all the taxes and everything that goes on. So we are in a serious divergence between a monetary view of the world and a biophysical view of the world. And this is because of our energy blindness.

And so that's my rant for today on frankly. and I would like to expand on this a lot more because what I covered today, each of these points has to be unpacked with references and graphs and details. But I just wanted to give a flavor for how naive our culture, our media, our universities are, on the role of energy in our lives and the energy financial situation we face. To be continued.