Nate Hagens on Peak Oil and Debt

Podcast via http://media.chrismartenson.com/audio/nate-hagens-2011-08-01.mp3

Excerpt

"Excerpted from an interview of Nate Hagens (editor of the Oil Drum) by Chris Martenson:

“CM: However we look at it, money [is] a great proxy for energy, so let’s use that. Energy’s going to become more expensive going forward and there’s going to be slightly less of it. Those are two pieces of the story, in your mind, from now stretching into the future.

Nate Hagens: Yeah, that’s right. And, you know, the main reason that’s a problem is because our entire system is based on the incorrect assumption that energy, which underpins every single physical service transaction we have in this economy, is substitutable. You can substitute capital or labor for it. And in reality, that’s not true. If you don’t have energy, you don’t have an economic transaction.

So if it becomes either more expensive or unavailable, both of those have deleterious impacts to economic growth. And we’re kind of in what I call the “biophysical gauntlet” right now, which is that oil, we’ve found all the Beverly Hillbilly Oil 60 to 70 years ago that was bubbling right under the surface, and now we have to drill deeper, drill further offshore; create things that aren’t really oil and process them into oil, like tar sands and oil shale. And all these things cost a lot more for the energy companies to produce. And society is reaching the point of being insolvent because of our claims and liabilities. And eventually we get to a point where the oil companies need higher and higher oil price in order to make a profit, but society can afford less and less. And at some point those two prices of oil cross and we have a real problem. You know, right now, the marginal barrel of oil costs between $70 and $90, so there’s a little bit of a cushion in there now. But a lot of people say above a hundred dollar oil, it has significant economic headwinds. So at some point there, dollars don’t become an accurate measure of our real natural resource balance sheet.

And as you know, part of the tenets of biophysical economics is measuring our natural resource endowments in natural resource terms, themselves. For example, Energy Return On Investment (EROI) is how much energy it takes to get one unit of energy in our society. And 70, 80 years ago, we would invest one barrel of energy to get out a hundred barrels of oil, and that 100:1 ratio declined to 30:1 in the 1970s, and it was around 10:1 in the year 2000, and the EIA stopped producing data on how much energy it takes to get energy. So we can kind of interpolate it now, but it’s clearly under ten in single digits.

And you eventually get to a point, even if oil is $100,000 dollars a barrel, or $1 million dollars a barrel, if it takes one barrel of oil to get out barrel of oil, you’re kind of out of gas at that point.

Chris Martenson: So the energy return on energy invested, or EROI, has been declining steadily. I want to just back up for a second. So here we are, if we scan the papers this morning, you know, we’ve got a debt-ceiling sort of mini-drama going on in D.C. We’ve got Italy’s bond spreads blowing out. Greece is clearly in trouble. Everybody’s familiar with the whole Portugal/Ireland story. Japan is in a pickle. China looks like it’s getting there. And as we scan across the landscape, we can’t really find any corner of the globe at this point, at least in all the advanced economies, where things look like they’re working as they used to. So if we just have our economic hats on, I believe this is a very, very confusing period of time. I know our economic high priests and priestesses are waiving their magic money wands wondering, I bet, why isn’t this working? You know, where is unemployment? Why is it stuck there? Whereas, if we step over here into the energy world and put our EROI hats on and we say look, this is perfectly predictable, I think. When you have less available net energy, these are the sorts of problems you might experience and expect. Does that make sense to you, or is that even remotely how you see it?

Nate Hagens: It makes absolute sense. We need energy to create our physical realities and create our economic growth and trade for transport, everything. If the energy sector requires a greater and greater chunk of that energy, we have less available for the rest of discretionary society. And once that constraint exists and even accelerates, you need to respond to that. And the way we responded to that was increasing our debt, which, of course, as you know, is pretty much created by a pen stroke. So that can temporarily offset energy shortages at a cost of a steeper decline, because debt actually functions as a spacial and temporal reallocater of resources, away from the periphery towards the center and away from the future towards the present. So there’s a very subtle but important relationship between debt and energy. And the problem is, is that most of, as you term, economic priests and priestesses, don’t have training in the biophysical economic world, and they treat everything in monetary terms. And we just throw more money at the problem, and it’ll go away. Well, our energy, and especially our net energy story, is getting worse. So we’re increasing our money supply while our energy supply is declining, and, yeah, that’s not a good situation.” (http://www.chrismartenson.com/blog/nate-hagens-were-not-facing-shortage-energy-longage-expectations/61024?)