THE ECONOMY CHANGES WHEN OIL BECOMES UNAFFORDABLE. HERE’S HOW.
We’ve never seen the end of cheap oil and cheap money at the same time.
A conversation with minerals analyst Dr. Simon Michaux, an Australian by birth, who possesses a PhD in mining engineering, with years of industry experience. He now works for the government of Finland.
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HART HAGAN: One of the things that I've learned from you is that we're going to run out of cheap energy. The amount of energy we use is no longer going to be a policy choice based on our benevolence or our generosity or our prudence. It's going to be thrust upon us.
I want you to talk about the decline in cheap fossil fuels and then, let's talk about the materials and minerals limitations associated with so-called renewable energy and electrification of vehicles.
SIMON MICHAUX: It's futile to predict the future and it's futile to dictate what the future would be in our plan for response. My approach now is to understand the influences and how those influences interact with each other. Our current technology is petroleum-based.
Economically, we are still heavily heavily dependent economically on petroleum, right? Back in the day--let's say go back to 1900--coal technology was just starting to come in. There was already a complex system in place that was based on coal and steam technology.
Now we've got oil, the most calorie dense energy source we've ever seen. Over a century we have built up this system around us, and we’ve settled into various ways of how that system operates--cars, trucks, buses--and how society uses them. We've gotten used to all this. A lot of it was built during the 50s and 60s. But since 1970, we have stopped expanding the system, and we've tried to maintain what we have through efficiency measures.
Since the early 1970s, things have become more and more difficult. What's happening is that 50, 60, 70 years ago, the energy that we got from oil and gas did not require that we put much effort in to get a high quality action out. This is the the concept of energy return on energy invested.
HART HAGAN: Energy return on energy investment is like, you have to invest a certain amount of money in order to get a barrel of oil or whatever it is. That naturally goes down over time, because when something is abundant, it's cheap to extract. When it becomes more scarce, it becomes increasingly more expensive to extract.
That's the concept of “energy return on energy investment.” It declines over time.
SIMON MICHAUX: Yep. So in 1900, it was around 100 to 1. For every unit you put in, you got 100 back whether it was dollars or units of energy. There was a time where you could drill a hole, and oil would just shoot into the air, and you catch it with a bucket. And it didn't need that many processing steps to actually use.
By contrast, now you've got to go out into the middle of the ocean where it's quite deep. Then you've got to drill down--10,000 feet into the ocean floor--to find the oil. Then once you’ve found it, you have to get it up and then get it back to shore. Then you go through a whole series of processing steps.
So the cost of oil went up. Sometime in the 90s or 2000s it started at $20 a barrel. Since 2005 it’s been over $100 a barrel. So we're having to put much more in to get the same unit of energy out.
HART HAGAN: So, here's the thing. Energy return on energy investment declines incrementally over time. But when you bring in the concept of money, somehow that takes a gradual decline and turns it into a precipice.
SIMON MICHAUX: Marion King Hubbert had a great idea, the old Hubbert Peak. This was peak oil but he didn't have all the information at hand and now we're using technology to sweat more and more oil out of our deposits. We're now getting to the point where we're wanting to expand more and more each year. We are consuming more and more each year, and to get each unit we're having to exert more and more effort, which is why our money system is expanding more and more just to keep up.
So when I say expanding per capita, I mean the amount of money being spent and exchanging hands now is much more than what it was in the 1940s and the 1950s.
HART HAGAN: One question I've had, when you've talked about limited energy supply as it relates to money, is this: Are we talking about inflation adjusted dollars? And how do you define inflation? When governments print fiat currency, how does that factor in?
SIMON MICHAUX: So what's happening since the Federal Reserve was founded in 1913 or 1916? Since then they've had the ability to print money and they had fractional reserve banking. This means the money supply could be actually increased by the commercial banking sector by handing out loans. So the system was expanding, but that's good, right? But it's not based on anything real. There comes a point where you've got to pay the piper. So now that we've got inflation where everything's devaluing. And you know how much prices are rising year on year. I call this the road to Zimbabwe.
HART HAGAN: Because Zimbabwe had hyperinflation.
SIMON MICHAUX: Yes. And it was very famous. It wasn't that long ago, 2008, and they very famously had a 100 trillion dollar note. It was worth about about 30 Euros when they finally shut it down.
HART HAGAN: It’s like, “Hey, can we just use dollars?”
SIMON MICHAUX: But I believe that's going to happen to dollars, but also every other fiat currency is going to follow that.