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America’s Fossil Fuel Economy Is Heading For Collapse

Above Photo: Maarten van den Heuvel / Unsplash.

It Signals The End Of The Oil Age.

US oil production is about to peak, but the world is unprepared for the tremendous economic and political consequences. The only path through is energy and economic transformation.

The global economy is currently teetering on the edge of a banking crisis. The IPCC has just released its final major report warning that global carbon emissions need to peak and decline immediately if we are to avoid plunging into dangerous global warming by breaching the 1.5C ‘safe limit’. And in recent weeks and months, industry leaders have announced that the US shale oil and gas revolution is over.

Yet few if anyone is talking about why these things are happening at the same time, and what they really mean.

One of our biggest problems is that we tend to think in silos and sectors. But in the real world, the sectors we assume operate separately are in fact fundamentally interconnected. We ignore and downplay these systemic interconnections at our peril.

The persistence of global inflation has taken many economists by surprise. While they recognise that the impact of Russia’s war in Ukraine on energy and food supplies has been the biggest driver, that silo-ed assumption has led to a failure to understand why inflation is unlikely to simply disappear anytime soon.

We have good reason to believe that the underlying drivers of inflation go beyond just the war in Ukraine. Although it’s extremely difficult to quantify, climate change and environmental degradation is driving inflation by eroding agricultural productivity leading to higher food costs. The impact of extreme weather events is also creating larger and larger damages to infrastructure which in turn is incurring greater costs. As these costs feed into the system, the supply of goods and services becomes more expensive.

Less difficult to quantify is the fact that inflation is historically linked to energy price hikes. And there is mounting evidence that the world is experiencing a major shift in the global fossil fuel system that entails rising costs and diminishing returns, which will end up having a major inflationary effect for far longer and deeper than conventionally assumed.

The end of the shale boom

Since late last year, there have been a growing number of reports pointing out that the US shale revolution is coming to an end. Yet the massive global consequences of this are not being discussed.

“US Shale Boom Shows Signs of Peaking as Big Oil Well Disappear” read one headline in the Wall Street Journal. “The aggressive growth era of US shale is over,” Scott Sheffield, CEO of top independent shale firm Pioneer told the Financial Times. “The shale model definitely is no longer a swing producer.” And according to Bloomberg: “The specter of peak oil that haunted global energy markets during the first decade of the 21st century is once again rearing its head”.

US industry executives are now openly acknowledging that US oil production is likely to peak within the next five or six years, or perhaps in 2030. But there is mounting evidence that the peak will come much earlier, with some industry observers pinpointing its arrival as early as within the next one or two years.

What’s extraordinary about these admissions is how little they are impacting public debate. The implications are seismic. They contradict bullish overinflated forecasts of the industry made two decades ago – in 2005, for instance, Washington DC think-tank RAND Corp was forecasting that the US had enough shale oil to last some 400 years; and in 2012, a senior ExxonMobil executive claimed that the US has “about 100 years of natural gas supply”.

These grand claims were often breathlessly reported as unimpeachable fact by some of the most respected media institutions in the world.

Naysayers (like myself) warning that shale oil and gas would offer at best a temporary boost that was bound to peak and decline in the near-term with major global economic consequences, were dismissed as ‘doomers’.

Now, it turns out, we were right all along.

Mistakes of forecasting

That’s not to say that the traditional ‘peak oilers’ at the time were spot on. They wrongly expected that following the plateauing of conventional oil around 2005, oil prices would rocket up permanently into triple digits as global oil production would go into terminal decline. That didn’t happen. Instead, global demand shifted to the more expensive forms of unconventional oil and gas – especially US shale – which made-up much of the short-fall as conventional oil production slowed down.

But this was a recessionary environment, so global demand was much lower than expected. The massive 2005-2008 global oil price spikes helped induce a banking collapse. After the 2008 financial crash, this meant that there was much less demand for oil – but as oil production projects are planned years in advance pegged to expectations of demand, the oil just kept pumping despite much lower demand due to economic recession.

The result was a glut of shale oil and gas on world markets that allowed oil prices to drop and fuelled widespread belief in a new era of ‘Made in America’ cheap oil.

The US shale boom had a good run, no doubt about it – but its ‘healthy’ lifespan appears to be around two decades. If US shale oil and gas is about to peak and decline in the next few years, what does this mean for the US and global economy?

Coming economic contraction

Given that the US shale revolution played the key role in keeping global oil prices down and lubricating the energy requirements of continued economic activity, the retraction of the US shale revolution will have massive economic impacts.

US production has accounted for around 70% of the total increase in global oil capacity since 2019, and 75% of growth in liquified gas supplies. So as US shale oil and gas peaks, plateaus and declines, global oil and gas production will do so too very shortly after.

Gulf oil and gas producers, however, will not be able to step-in to fill the shortfall. US oil production is currently averaging around 11 million barrels per day (mbd).

2022 analysis of production data among the Organisation of Petroleum Exporting Countries (OPEC) which include the biggest powerhouses such as Saudi Arabia and the UAE, suggests that the maximum OPEC could collectively increase production is around 4.5 mbd – that is, less than half of current US shale production.

It’s also not clear how long OPEC can deploy spare capacity to maintain maximum levels of production. This suggests that OPEC will not be able to meaningfully fill the supply gap as US shale declines, which is a clear indicator that total global oil production will eventually begin to peak and decline.

In 2017, I assessed these trends in Failing States, Collapsing Systems. I predicted that US oil and gas production would probably peak and plateau around 2025, and that major Middle East producers would peak and plateau around the 2030s. This scenario now appears to be unfolding before our eyes. Yet no one is talking about it.

The near-term economic and financial consequences will be devastating, and they could lead to permanent long-term consequences without significant transformative action. The impact on the US economy will be profound.

Shale production accounted for 10% of GDP growth in the United States from 2010-2015, which means that the next decade of shale’s plateauing and decline will gradually wipe this out. This will be experienced as a protracted inflationary economic crisis which, in turn, will contribute to volatility in global financial markets. Pundits will likely fail to understand these systemic interlinkages, focusing instead on failing banks, financial institutions and debt, without understanding its energetic triggers.

All this implies that we are sleepwalking into a global energy crisis that will, without accelerating the clean transformation of the energy system, create severe economic and financial consequences by undercutting the fundamental energetic basis of global economic flows. This will compound accumulated vulnerabilities in the banking system linked to unsustainable forms of debt.

The reverberations and bailouts seen in the cases of the Silicon Valley Bank, Credit Suisse and others are merely the opening cracks, that will become widening fissures in the absence of root-and-branch economic restructuring linked to the rapid development of a new energy system.

While that new system is still emerging, it is perhaps unavoidable that we will hit a number of bottlenecks. The danger is that instead of using these bottlenecks to restructure and adapt positively, we may end up regressing, with a loss of capital and energy that forestalls the full potential of transformation.

The window for action is extremely short: we need to act within this decade. Along the way, we need to be aware of the major trends which are likely to emerge as a result of the end of the US shale boom:

1. The illusion of cheap oil is evaporating

While we may still see fluctuating prices, it is becoming clearer that the glut of cheap oil this last decade was not a permanent feature of the energy system, but a temporary symptom of highly specific circumstances as the energy system moves deeper into a state of increasing inputs and diminishing returns. The immediate impact of the peak and plateau of US shale will be sustained high oil prices.

2. The near-term beneficiaries of this will be Gulf oil and gas producers

They currently appear to be the only fossil fuel energy suppliers with sufficient capacity to maintain production. They will therefore not only begin to dominate market share, they will also of course continue to reap higher profits from this more advantageous market position amidst high oil prices.

3. Some capital will move into OPEC for safety, but this is a mirage

Just as this last decade created the illusion of fossil fuel abundance due to the US shale boom, we may see that OPEC’s near-term ability to ramp up spare capacity as shale production declines perpetuates this illusion. We can expect to see lots of bullish statements from Gulf oil producers vindicating grand plans to expand their oil and gas production. Capital will move rapidly into OPEC countries, seen as a last safe space for investors looking for stability and growth. However, OPEC producers will also begin experiencing their twilight very shortly after the decline of US shale, which means that investors will begin to make serious losses as a result far sooner than they imagine.

4. Oil prices will fluctuate within a higher range as US shale peaks

While we can expect significant oil price volatility due to the recessionary impact of high oil prices which would lower demand and therefore allow prices to drop, as we move further into the era of plateau and decline across US and OPEC production, the overall decline in supply is likely to lead oil price fluctuations to narrow within a far higher range which will become a ‘new normal’ as long as oil demand remains high. This may also incentivise near-term conviction in the idea that new oil and gas investments are economical. That would be a colossal mistake, though, as we will see below due to coming reductions in oil demand in the latter half of this decade that will ameliorate high prices and make fossil fuel enterprises increasingly unprofitable.

5. We can expect heightened political polarisation

Incumbent industry ideology will likely blind many energy actors from recognising the writing on the wall – which explains the regressive self-defeating actions of the Biden administration in committing to Arctic drilling. This is like betting on the losing horse after being told it’s about to be overtaken by cars. It illustrates the power of America’s oil lobbies in their last ditch desperate attempt to stay alive on the back of taxpayer subsidies – flying in the face of hard economic realities (a few years ago I broke the story of the British military study which concluded that Arctic drilling was pointless for economic reasons because the costs are so high and returns so low as to make it commercially infeasible). That in turn suggests the political battleground between fossil fuel lobbies and clean energy advocates will become more fraught as the incumbency seeks to double-down in demanding more government subsidies. Millions of jobs will be at risk as the US shale industry declines, and this could create further negative economic and cultural consequences as the US returns to net import status.

6. Clean energy transformation will be critical to stabilise the global economy and restore prosperity

The only viable pathway through this crisis will be to accelerate the clean energy transformation focused on the deployment of exponentially improving technologies which are already scaling because they are cost-competitive with fossil fuels – namely, solar, wind and batteries. This will lay the groundwork for other potential applications such as e-fuels or green ammonia from green hydrogen. This transformation is already underway, and provides the opportunity for the US and others to produce larger quantities of energy at a fraction of the costs of fossil fuels. In Rethinking Climate Change, a RethinkX report for which I was contributing editor, we found that even in the absence of appropriate policy-decisions and major institutional barriers, economic factors will inevitably drive incumbent industries to collapse by 2040 as they are replaced by new solar, wind and battery systems. Unfortunately, while this is far faster than conventional analysts acknowledge, this is not fast enough to avoid dangerous climate change.

7. Oil demand is going to haemorrhage, because the clean energy transformation is now unstoppable

The data examined by RethinkX implies that oil demand is likely to peak far earlier than incumbent energy agencies predict, and decline far more rapidly following the peak. The RethinkX report suggests that oil demand will likely peak sometime between 2025 and 2030, followed by an escalating drop out to 2040. It’s critical to recognise that the economic drivers of this approaching decline in oil demand are not confined to disruptive energy technologies, but include the disruption of the transport and food systems by electric vehicles, autonomous electric vehicles, precision fermentation and cellular agriculture. This also shines a light on the knife-edge civilisation is moving into this decade: as the incumbent energy industry declines, bringing with it the economy, there is a risk that it derails the economic factors currently driving the exponential adoption of clean energy technologies. Which means that we need to accelerate adoption this decade.

8. High volatile oil prices will be followed by crashing oil prices once demand peaks and declines

In the late 2020s, then, we will likely see oil demand begin to peak. This will be exacerbated by the fact that the global oil industry is going to become economically unsustainable by around 2030, when it will begin consuming a quarter of its own energy just to keep pumping out more oil. Even the Journal of Petroleum Technology published by the Society of Petroleum Engineers is taking this prospect seriously. As oil demand declines, oil prices will also decline. At this point, assuming the accuracy of the latest EROI studies, the collapse of the global industry will begin to accelerate because once prices go below a certain point and with EROI levels already unsustainable, the industry will simply become impossible to sustain economically.

What to do?

A big question that emerges here, of course, is how to accelerate the transformation.

The main task is simple: we need to raise awareness of the fact that the end of the Oil Age is fast approaching and will arrive within the next two decades. This inevitable arrival will not in itself mean that we avoid dangerous climate change. But it will mean that oil and gas assets are stranded – they have been vastly overvalued and therefore investments in them will never incur the projected returns, resulting in trillions of dollars of losses. This is not simply due to the prospect of climate policy action, but the reality of unfolding technological disruptions of energy, transport and food, and the internal EROI dynamics within the industry itself.

But while the immediate implications of this for conventional investments in incumbent industries are dire, the wider implications are mind-blowing. It means that the most lucrative areas of new investments where the highest potential for returns can be found will ultimately not be in the dying fossil fuel industries but in exponentially improving technologies which are on track to transform our societies for the better.

These technologies could help unlock future prosperity for all, as long as they are deployed in in the context of a new social, organisational and cultural paradigm optimised for decentralisation.

Among the biggest barriers to transformation are that financial institutions and policymakers still do not largely understand these processes, which are phase-shift dynamics. This means that the inflation crisis is not a crisis within a static, incumbent economic system; it is a symptom of the demise of the Oil Age system as a new potential system emerges, which means that trying to solve it using the same old macro-economic tools (e.g. hiking interest rates; austerity; etc) of the old system will not work. Rather, we need to accelerate the emergence of the new system, which requires maximising capital flows into the major drivers, technologies and organising structures of that new system. That, at its most baseline level, requires macro-economic incentives for those capital flows.

It is therefore imperative to increase awareness of the end of the Oil Age among key stakeholders, to increase the scope for better decision-making. That means much more robust forms of organising to disseminate these more accurate systems approaches to understanding the world into the most strategic spaces to leverage maximum potential for impact.

We also need to prepare ourselves and our organisations for what is coming. That requires not only looking at material processes, supply chains and things like that – it also means looking ahead at what sort of values, societal structures, and economic models work best for the emerging system. Ultimately, we need to develop and embody new holistic ways of seeing and being in the world which empower us to recognise and navigate complexity, and especially for this coming period of upheaval.

In future posts, we are going to explore further implications of this analysis. We will look at what all this means for how we think critically about systems and increasingly mainstream concepts like ‘polycrisis’; based on the major trends identified here we will explore various emerging scenarios that could plausibly unfold over the next decade; and based on that, we will be able to develop a more precise idea of what needs to be done.

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