What allows any type of energy to be sustainable? I would argue that one of the requirements for sustainability is adequate production of taxable revenue. Company managements depend upon taxable revenue for many purposes, including funding new investments and paying dividends to shareholders. Governments depend upon taxable income to collect enough taxes to provide infrastructure and programs for their growing populations.
Taxable income is a major way that “net energy” is transferred to future investment and to the rest of the economy. If this form of net energy is too low, governments will collapse from lack of funding. Energy production will fall from lack of reinvestment. This profitability needs to come from the characteristics of the energy products, allowing more goods and services to be produced efficiently. This profitability cannot be created simply by the creation of more government debt; the rise in the price of energy is tied to the affordability of goods, particularly the goods required by low-income people, such as food. This affordability issue tends to put a cap on prices that can be charged for energy products.
It seems to me that Green Energy sources are held to far too low a standard. Their financial results are published after subsidies are reflected, making them look profitable when, in reality, they are not. This is one of the things that makes many people from the financial community believe that Green Energy is the solution for the future.
In this post, I will discuss these ideas further. A related issue is, “Which type of oil production fell most in the 2018-2021 period?” Many people had expected that perhaps high-cost energy production would fall. Strangely enough, the production that fell most was that of OPEC oil exporters. These oil exporters often have a very low cost of energy production. The production of US oil from shale also fell.
If the ratio of Energy Return on Energy Investment (EROEI) is to be used as a measure of which type of energy best meets our needs, perhaps the list of items to be included in EROEI calculations needs to be broadened. Alternatively, more attention needs to be paid to unsubsidized taxable income as an indicator of net energy production.
[1] According to EIA data, world crude oil production hit a peak of 84.5 million barrels per day (bpd) in the fourth quarter of 2018. Production fell as low as 72.3 million bpd in the third quarter of 2020. Production rebounded to 75.4 million barrels of oil a day, still 9.1 million bpd below peak production in the 4th quarter of 2018.
This drop in oil production was unprecedented. It far exceeded the drop in oil production at the time of the Great Recession of 2008-2009. As of the first quarter of 2021, crude oil production was roughly at its level in 2011. It still has not rebounded very far.
[2] The biggest drop in crude oil production during this period was that of the cartel led by OPEC and Russia. United States’ oil production also fell during this period. Production of the Rest of the World, in total, was fairly flat.
The big concern of OPEC and Russia was that crude oil prices were too low to provide adequate tax revenue for the governments of these countries. This is especially an issue for countries with few other industries besides oil. These oil exporting countries tend to have large populations, with little employment besides government-sponsored projects. Nearly all food needs to be imported, so subsidies for food need to be provided if the many people earning low wages are to be able to afford this food.
If oil prices are high, say $150 per barrel or higher in today’s dollars, it is generally fairly easy for governments to collect enough oil-related taxes. The actual cost of extraction is often very low for oil exporters, perhaps as little as $20 per barrel. The need for tax revenue greatly exceeds the direct expenses of extracting the oil. Companies can be asked to pay as much as 90% of operating income (in this example, equal to $130 = $150 – $20 per barrel, probably only relating to exported oil) as taxes. The percentage varies greatly by country, with countries that have higher costs of production generally paying less in taxes.
When oil companies are asked about their required price to break even, a wide range of answers is possible. Do they just quote the expense of pulling the oil from the ground? If so, a very low answer is possible. If shareholders are involved in the discussions, this is the answer that they would like to hear. Or do they give realistic estimates, including the taxes that their governments need? Furthermore, if the cost of extraction is rising, there needs to be enough profit that can be set aside to allow for the drilling of new wells in higher-cost areas, if production is to be maintained.
Because of the need for tax revenue, OPEC countries often publish Fiscal Breakeven Oil Prices, indicating how high the prices need to be to obtain adequate tax revenue for the exporting countries. For example, Figure 4 shows a set of Fiscal Breakeven Oil Prices for 2013 – 2014.
If a country tries to maintain the same standard of living for its population as in the past, I would expect that the fiscal breakeven price would rise year after year. This would occur partly because the population of OPEC countries keeps rising and thus more subsidy is needed. The fiscal breakeven price would also tend to rise because the easiest-to-extract oil tends to be depleted first. As a result, new oil-related investments can be expected to have higher costs than the depleted investments they are replacing.
In fact, if a person looks at more recently published fiscal breakeven prices, they tend to be lower than the 2013-2014 breakevens. I believe that this happens because oil exporters don’t want to look desperate. They know that attaining such high prices is unlikely today. They hope that by using more debt and reducing the standard of living of their citizens, they can somehow get along with a lower fiscal breakeven price. This is not a long term solution, however. Unhappy citizens are likely to overturn their governments. Such a result could completely cut off oil supply from these countries.
[3] A cutback in oil production is not surprising for the OPEC + Russia group, nor for the United States, given the chronically low oil prices. The profitability was too low for all of these producers.
Oil prices fell in late 2014. Fiscal breakeven prices calculated before that date likely gave a somewhat reasonable estimate of the needed prices for oil exporters to make an adequate profit, at that time. By early 2019, when the first decreases in oil production began, these countries were beginning to become fed up with chronically low oil prices.
It is interesting to note that Qatar, the country with the lowest breakeven price on Figure 4, decided to withdraw from OPEC effective January 1, 2019, rather than reduce its oil production. For Qatar, oil prices in late 2018 and early 2019 were close to adequate. Qatar mostly produces natural gas, rather than oil.
The decrease in US shale oil production reflects somewhat the same low profitability issue as OPEC + Russia exports, with an additional factor added. Besides low prices, there seems to be a well-spacing issue. There are reports that the spacing of shale wells gradually got closer and closer, until the closer spacing became counter-productive. The more closely spaced wells “cannibalized” the output from nearby wells. The extra drilling may also have released needed pressurization, reducing oil availability.
Such a problem would have been a difficult issue to pick up from EROEI analyses because there are not enough of these EROEI studies to see sudden changes. Figure 6 shows the timing of the drop in US oil production, relative to the drop in oil prices:
Figure 6 omits oil from the Gulf of Mexico, because its quantity tends to bounce around, especially when a hurricane hits. Because of this exclusion, the oil shown in Figure 6 reflects a combination of declining oil production from conventional oil wells plus (after about 2011) rising production from shale wells.
Figure 6 shows that production of oil from shale was developed during the 2011 to 2013 period, when oil prices were high. When oil prices suddenly fell in late 2014, shale producers suddenly found production very unprofitable. They cut back on production starting in April 2015. Shale production started rising again in 2017 after prices moved away from their extreme lows. Growth in oil production began to slow in late 2018, when oil prices again began to fall.
The big shutdown in world oil demand associated with the COVID-19 epidemic began in the second quarter of 2020. Shale production fell in response to low oil prices in March through November of 2020. As of April 2021, production does not seem to have rebounded significantly. We have seen reports that workers were laid off, making it difficult to add new production. If, indeed, well-spacing had become too close, this may have played a role in the decision not to ramp up production again. It is quite possible that many drilled but uncompleted wells will permanently remain uncompleted because they are too close to other wells to be useful.
Based on this analysis, it seems likely that US oil production for 2021 will be lower than that for 202o. Ultimately, the lack of adequate profitability can be expected to bring US oil production down.
[4] There are some high-cost oil producers who continue to produce increasing amounts of oil.
The keys to maintaining high-cost oil production seem to be
- Large up front investments to make this production possible with little new investment
- Governments that are not very “needy” in terms of revenue from oil taxes
Even with these considerations, having an unprofitable or barely profitable oil industry weakens a country. Neither Brazil nor Canada is doing very well economically in 2021. These countries will likely reduce new oil investment in the next year or two, if inflation-adjusted oil prices do not rise significantly.
[5] Somehow, “Green Energy” has been allowed to compete in the energy field with huge subsidies. If Green Energy is actually to be successful long-term, it needs to be profitable in the same way that fossil fuel energy needs to be profitable. If wind and solar are truly useful, they need to be very profitable, even without subsidies, so that they can support their governments with taxes.
There tends to be little recognition of the extent of subsidies for renewable energy. For example, allowing the electricity from wind turbines and solar panels to be put on the grid whenever it is generated is a huge subsidy. Such generation mostly substitutes for the coal or natural gas used by electricity-producing plants, rather than the electricity generated by these plants. The many reports we see that compare the cost of intermittent electricity generated by wind turbines and solar panels with the cost of dispatchable electricity generated by fossil fuels are simply misleading.
Furthermore, electricity generated by wind turbines and solar panels doesn’t need to be sufficiently profitable to pay for the much larger grid they require. The larger grid requirement occurs partly because the devices tend to be more distant from users, and partly because the transmission lines need to be sized for the maximum transmission required, which tends to be high for the variable production of renewables.
The lack of adequate profitability of wind and solar on an unsubsidized basis strongly suggests that they are not really producing net energy, regardless of what EROEI calculations seem to indicate.
It might be noted that in past years, oil exporters have been accused of giving large energy subsidies to their oil producing companies. What these oil exporters have been doing is charging their own citizens lower prices for oil products than the high (international) price charged to foreign buyers. Thus, high taxes were collected only on oil exports, not from local citizens. With the fall in oil prices in late 2014 (shown in Figures 5 and 6 below), this practice of differential pricing has largely disappeared.
“Oil subsidies” in the US consist of financial assistance to low income people in the US Northeast who continue to heat their homes with oil. These subsidies, too, have mostly disappeared, with lower oil prices and the availability of less expensive forms of home heating.
[6] It seems to me that an economy really has three different requirements:
- The total quantity of energy must be rising, at least as rapidly as population.
- The types of energy available must match the needs of current energy-consuming devices, or there needs to be some type of transition plan to facilitate this transition.
- There must be enough “net energy” left over, both (a) to fund governments with taxes and (b) to fund any transition to different energy-consuming devices, if such a transition is required.
Thus, in order for a transition to Green Energy to really work, it must be extremely profitable on a pretax, unsubsidized basis, so that it can pay high taxes. The greater the need for a transition to different energy consuming devices, such as heat pumps for buildings and electric vehicles of many types, the greater the need for more net energy generated by Green Energy sources to help facilitate this transition.
High profitability for energy products is normally associated with a very low cost of energy production. Furthermore, the type of Green Energy available needs to be in a very useful form. In a sense, there are really two different energy transitions required:
- The output of intermittent electricity devices must be brought up to grid standards, using a combination such as many long distance transmission, very substantial battery backup, and the use of many devices to provide the electricity with the precise characteristics it needs.
- As mentioned above, if greater use of electricity is to be made, a transition to electric devices is required.
Both of these transitions will require a significant quantity of energy (really net energy not used elsewhere in the system) to accomplish. If fossil fuel energy is being phased out, an increasing share of this net energy will need to come from the Green Energy sector by way of the tax system. Such a system will only work if the Green Energy sector is very profitable on a pre-tax basis.
[7] Figure 8 suggests that the world has a problem with low energy consumption per capita right now.
There is a strong correlation between growth in total energy consumption per capita and how well the economy is doing. The slight downward slide in energy consumption per capita in 2019 indicates that the economy was already doing poorly in 2019. The huge downward shift in 2020 dwarfs the downward slide in 2009, when the world was in the midst of the Great Recession. My earlier research, looking back 200 years, indicates that low growth in energy consumption per capita is likely to lead to conflict among nations and collapses of governments. Epidemics are also more likely to spread in such periods, because greater wage and wealth disparity tends to occur when energy supplies are constrained.
Any shift away from fossil fuel energy to Green Energy will almost certainly mean a huge drop in world energy consumption per capita because the world doesn’t produce very much Green Energy. Such a drop in energy consumption per capita will be a huge problem, in itself. If the Green Energy sector doesn’t generate much taxable income without subsidies, this adds an additional difficulty.
[8] Conclusion: Examination of the EROEIs for various fuels, using calculations the way that they are performed today, gives inadequate information regarding whether a transition to another set of fuels is feasible.
Researchers need to be looking more at (a) the total quantity of energy produced and (b) the profitability of producing this energy. An economy is only possible because of profitable businesses, including energy businesses. A person cannot assume that energy prices will rise from today’s level because of scarcity. Today’s huge debt bubble is producing very high copper and steel prices, but it is not producing correspondingly high oil prices.
Heavily subsidized energy products look like they might be helpful, but there is little reason to believe this to be the case. If Green Energy products are truly producing net energy, we should expect this fact to be reflected in the unsubsidized profits that these products generate. In fact, if Green Energy products are truly producing large amounts of net energy, they should be so profitable that businesses will be rapidly ramping up their production, even without subsidies or mandates.