Art Berman is a superb energy analyst, and Nate Hagens is an excellent big picture person. This interview is highly recommended in its entirety. This is a deep dive into much more than the just the consequences of the war in the Gulf, which they rightly describe as the biggest mistake in human history (worse than Napoleon invading Russia as they describe it). Exports through Hormuz are down by 21million barrels of oil a day, or roughly the entire consumption of the United States. About 10 million barrels a day are getting out by other means, but a huge deficit remains. About 11% of global supply is offline. Their estimate is that this oil shock will be approximately 100 times as bad as the oil shock of the 1970s, largely due to the abrupt nature of the shut off. The consequences have not yet been felt in the imperial centre as they already have been in the global periphery, but they are rapidly approaching. The strategic reserves are being run down and may be gone by July. When they’re fully depleted, the economic train will hit the buffers at high speed.
Many tankers remain trapped in the Persian Gulf. If the strait were to open tomorrow, it would take 2-3 months just to clear the queue to leave the strait, after mines have been cleared, which will take time, and once insurers are again confident enough to cover transits. This will be a long term process. Tankers would then have to reposition themselves around the world for the oil transport business to resume, which will also take a considerable amount of time for ships moving at approximately the rate of a bicycle. Production which has been shut in would have to be reopened, but this isn’t amatter of flicking a switch. It’s a process, and production may never return to the previous level due to damage to the fields in the interim. In the best case scenario, extreme disruption would last all year and into the next, but the best case scenario is unlikely. Continued imperial military build up in the gulf suggests that the war is by no means over, and restarting it would result in further catastrophic damage to energy infrastructure in retaliation, given that the gulf monarchies are complicit in the attack on Iran.
The futures market is being manipulated in order to keep the oil price down, but the spot market represents the physical reality, where prices are soaring. Once reserves are depleted, the two will converge at the spot price in what will amount to a major shock. Refineries need to be profitable, and if they must pay much more for inputs, then the prices for refined products will inevitably skyrocket as well. Refinery throughput may also be throttled back. This will affect the US to a great extent, since almost none of the built environment was designed with walking or cycling in mind, and public transport is largely lacking. The car dependency is going to bite people in the behind. Other places may be more heavily impacted in terms of price or availability of supply, but if they’re more compact, more walkable, or well equipped with public transport, the impact on people’s daily lives may be less severe in some ways.
The US is currently exporting its own strategic reserves of long chain hydrocarbons, which are the critical input for the production of diesel, jet fuel, and bunker fuel. While it remains a net exporter of energy overall, what it exports is short chain hydrocarbons, while it’s an importer of long chains. Its refineries absolutely require those long chain hydrocarbons, as do almost everyone else’s refineries. This is where the supply crunch will really bite, given how absolutely essential diesel is to modernity. Different form of energy are not interchangeable. One cannot simply substitute one for another in many processes. Each has its own destination in complex supply chains, and many if those supply chains are about to be substantially, and perhaps fatally, disrupted. Diesel is the lifeblood of all modern economies, required for trucks, ships, trains, mining equipment and agricultural machinery without it a great deal of activity will grind to a halt. Demand for diesel is inelastic, so insanely high prices can be expected.
Good luck with the electrification agenda if mining ceases to be possible. In addition say good-bye to many forms of so-called renewables, which are actually dependent on fossil fuels, concrete, rebar, and rare earths. The lifespan of wind and solar projects is limited, and they’re unlikely to be able to be replaced at end of life. In addition, the energy they produce is non-dispatchable, and so cannot be relied upon for supply, and these installations cannot provide for the essentials of grid stability – frequency control, voltage control, reactive power, blackstart etc. Steel, plastic, cement and ammonia are the four pillars of modern societies, and all are dependent on oil supply.
Energy security will now be front and centre of all countries minds, so as soon as possible they’ll be accelerating exploration and drilling, and wanting to build reserves. New fields tend to be very small compared to the giant fields found decades ago, upon which the world still largely depends. Exploration and drilling are very costly upfront in energy terms, now that the easy to reach supplies have already been depleted. The regions now being explored therefore have a lower EROEI (energy returned over energy invested). The combination of larger amount of energy required for energy production, higher demand due to the attempt to build reserves, and much lower supply overall, is a recipe for extremely high prices, to the point where ordinary people may be priced out of the market entirely. High prices do not necessarily result in more production if there are few fields left to be found, and the technology is already at a level where most useful sites have already been discovered. Even if new fields are found, it would take years to develop them for production, especially in infrastructure-poor regions like the arctic, so the upfront energy investment would take years to pay off while the energy crunch would continue. This will inevitably amount to a major acceleration of the great simplification of society, given that socioeconomic complexity is a function of energy surplus.
Above ground factors will be more determinative for outcomes than the underlying geology. Human reactions, and typically over-reactions, to predicaments such as this drive circumstances in a feedback loop. Humans fight like cats in a sack when the economic pie is shrinking. The psychology of contraction set in, meaning that the dark side of human nature is in the ascendancy – suspicion, envy, possessiveness, exclusion, risk avoidance, blame – and this creates a self-fulfilling prophecy to the downside. Trust is rapidly lost, and trust is what hold societies together. Without it, effective organisation scale decreases dramatically, leading to the break up of political aggregations, often violently, as an ‘us vs them’ mentality sets in. Globalisation is over, and with it will go the complex supply chains developed over decades. Confidence in the Gulf as a place to do business has been lost, and confidence takes a very long time to rebuild. In the meantime, a risk premium will be applied to the region as a whole, meaning even higher prices.
People naturally want a better world, but are generally unprepared, or unable, to pay for it, or to reduce their expectations in line with what reality can hope to deliver. The era of papering over problems with debt is coming to an end, since it isn’t possible to print commodities as one can with currency. Globalisation was about reaching out spatially to exploit the resources of the whole world, while debt was stealing from the future. Peter Turchin’s work is important for understanding how this situation developed. At small scale supluses can be looted from individuals or villages. At large scale they can be looted from whole societies through imperial conquest. As Turchin says, agriculture provides the calories, weapons set the pace, bureaucracy turns energy and war into lasting power, and religion made it easier for people to accept. Looting through warfare has been the driver of growth for centuries.
Humans cooperate within what they perceive to be their tribe, but compete ruthlessly for resources with other tribes, as humanity as a whole is driven by the maximum power principle – groups that burn through resources fastest outcompete and take over those that conserve. This has been referred to as the inevitable collision between a genetic imperative and thermodynamic reality – the thermogene collision. The coming future will involve much less energy density, and likely many fewer people, given that the fertiliser shortage, aggravated by high diesel prices, is set to reverse the green revolution. Humanity will be functioning in smaller numbers, at smaller scale, and in simpler societies after the cascading system failure that’s rapidly approaching. Large scale creates terrible predicaments for humanity as a whole, even as, driven by a fossil fuel inheritance, it has elevated subsets of people beyond the dreams of avarice. The future will operate more closely to human scale, albeit at a much lower level of material prosperity. This future belongs to the adaptable.
