Expensive energy

Fact: The world is addicted to fossil fuels. Currently, we consume fossil fuel energy at a rate of roughly 15 TW. If this work were to be done by horses for example, we would need 20 billion horses working 24/7 to supply our energy needs. The average person in the developed world uses energy at a rate of roughly around 10 kW. This is equivalent to 14 horses (or 140 slaves) working 24/7 for every man, woman and child. Needless to say, if something serious were to happen to all of our fossil fuel horses/slaves, our entire glamorous society will almost instantly crumble to dust.

To put this into even better perspective, consider that a gallon of gasoline contains around 500 hours of physical human labor. We complain a lot about gas at $4/gallon, but consider that 500 hours of manual labor at the minimum wage of about $8/hour translates to $4000 – i.e. 1000 times more expensive than a gallon of gas. This is the amazing power of this once-in-a-100-million-year gift of cheap energy we got from our planet. And it really is quite shocking how badly we take it for granted. 

Despite the great potential of nuclear and renewable energy sources, fossil fuels will be expected to contribute the majority of our energy needs for many decades to come (shown above). This is becoming a serious problem because, even though we still have a lot of fossil fuels, these fossil fuels are becoming increasingly difficult (and more expensive) to extract. In addition, climate change and other environmental concerns are starting to add to the cost of fossil fuels, making our primary energy source even more expensive.

As an example, the much hyped giant shale oil fields in the USA yield oil at roughly $60 per barrel. In comparison, a country such as Kuwait can still extract oil from their conventional oil fields for as little as $3 per barrel. The new unconventional oil, even though there seems to be a lot of it, is therefore 2000% more expensive than the conventional oil which fuelled the rapid rise of western civilization.

An additional very important point is the energy usage that is required to extract new unconventional fossil fuels. The first conventional oils required practically no energy to extract because they simply burst out of the ground under their own pressure. Unconventional sources such as Canadian tar sands and US shale oil requires one unit of energy for every two units which are extracted. Increasing the production of these unconventional oils will therefore greatly increase the global energy demand, making energy even more expensive.

The most striking example of the effect of energy prices on an economy is shown in the graph below where the US energy costs are expressed as a percentage of total GDP. Now we all know that the mad greedy rush to unearned wealth through speculation that gripped the western world in the run-up to the 2008 sub-prime mortgage crisis drove up oil demand (and prices) like never before (shown on the right). Sure, the 3.6% increase in the energy contribution to the total GDP between 2002 and 2008 might not sound like much, but remember that the price of energy influences the price of everything else, implying that total GDP will increase greatly with increased energy prices, thereby masking the real energy price increases.

It is common knowledge that the financial crisis officially began when the owners of sub-prime mortgages began defaulting on their loans en masse. Once these first defaults happened, the delicately stacked house of cards (massive unsustainable debt) came tumbling down. But what exactly caused those first homeowners to start defaulting? Well, many people think that the rapidly rising energy prices (and the parallel rises in the cost of everything else) were the primary factor.

Almost half a decade has passed since the collapse of the housing bubble, but the sad news is that the world seems to have learned absolutely nothing from that painful experience. The only difference is that, instead of private homeowners buckling under unsustainable debt burdens, we now have entire countries buckling under unsustainable debt burdens.

Countries are not all that different from people. They earn their income (taxes), pay their bills (government spending) and take on loans to cover the difference. And yes, if high energy prices cause their bills to escalate and their income to dwindle, they lose their ability to make repayments on their massive loans and the house of cards comes tumbling down once more.  The only difference is that this time entire countries will go bankrupt.

Literally the only way to avoid this situation is to decrease the cost of energy. And, if we don’t want to burn more and more cheap and dirty coal, literally the only way to do that is to decrease the demand for energy. Unfortunately, as discussed in the summarized global problem statement, our current economic system demands exponential growth every single year in order to continue existing. If there is no growth or negative growth for extended periods of time, Greece happens. And yes, as the figure below shows, the past decade has shown an almost perfect correlation between economic growth and energy usage.

It is therefore clear that our current system is mathematically guaranteed to fail. If we keep on growing, energy costs will once again rise so high that people (and this time countries as well) can no longer pay their loans, leading to a global economic collapse. If we stop growing, people (and countries) who took on massive loans on the totally absurd assumption that salaries and property prices will keep on increasing forever will no longer be able to pay their loans, leading to a global economic collapse. Damned if we do, damned if we don’t.

The way that we have been dealing with this problem thus far is to grow through cheap labour in developing nations fuelled primarily by cheap and dirty coal. This strategy is unsustainable in itself due to our  finite planet discussed in the next page.

7 thoughts on “Expensive energy”

  1. I don’t think that burning all the Earth’s fossil fuels is a survivable strategy. And, even if it could be, I don’t much like the idea of carbon capture and storage (CCS) because, unlike nuclear waste, buried CO2 will have no half-life – it will never be safe for it to re-enter the biosphere.

    In the meantime, however, our politicians refuse to phase-out the use of fossil fuels (as agreed that they would seek to do at the G20 Summit in Pittsburgh in 2009) – precisely because the fossil fuel lobby has convinced them that CCS is a viable excuse for “business as usual”.

    However, unlike fossil fuels (which will only ever get more expensive as supply decreases and/or demand increases); renewable energy will only ever get cheaper as both supply and demand increase…

  2. Sir, I have read your other post about energy. You covered various alternative energy source, like wind power, nuclear power, solar power, but I realize you haven’t covered geothermal energy. Is it a viable alternative or will it not work, just like other alternatives you have mentioned?

    1. Geothermal is a good source of economically viable and steady power. Unfortunately we cannot get much of it. The world currently has about 11.5 GW of geothermal capacity installed – enough to supply roughly 0.4% if global electricity. Capacity is only increasing slowly, so we should not expect too much from this technology.

      1. I see. Perhaps the final answer to our insatiable demand for energy lies in the vacuum energy, as postulated in quantum mechanics…

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