Wednesday, May 4, 2016

Why Natural Gas Can't Save Us

Thanks for writing. The problem is that the rising investments required cause the system to fail. In a sense, an EROEI drop from 100:1 to 99:1 is just as damaging as an EROEI drop from 10:1 to 9:1. There is also the problem that all of the economy is a networked system, so rising investments in oil adversely affects the overall system, not just oil. Of course, I am thinking of the rising investments in terms of human labor as fossil fuels. What is happening is the system as a whole is becoming increasingly inefficient.

I was surprised when I found that coal companies were failing as fast, or faster, than oil companies unless the coal companies are operating in a “utility” type structure that allows prices to rise with rising costs. What I found when I looked at some coal company financial statements is that they were being affected by the overall drop in commodity prices (just like metals and many kinds of food are being affected). Back when revenue streams had been higher, the various players had locked in an approach to dividing up revenue flows. Fees for using the land for mining were based on the price structure available in the past; debt payments for new mining equipment and for upgrades to port export facilities were based on cash flow projections when prices were higher; taxes (which are not based on profits!) were set based on how much the government thought it could take, and still leave the company with enough for its other expenses and dividends. Since 100% of the former energy flows had been contractually locked in, a drop in price fell entirely back to the owners!

Regarding the changeover to natural gas, I doubt that there is enough of it for a complete changeover. In the meantime, the whole system will collapse from low prices. It is certainly not possible to add natural gas, if the price level needs to be kept close to coal. If the price of natural gas is higher, wages of workers will also need to be higher. Products will become increasingly uncompetitive in world markets. - Gail Tverberg

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