Net Energy End Game Theory…

Off the keyboard of Steve from Virginia

Published on Economic Undertow on January 23, 2013

The time frame is less than two years: the world becomes net energy negative. At that point there is no turning the clock back.

Discuss this article at the Epicurean Delights Smorgasbord inside the Diner

Gregor Macdonald discusses the end of inexpensive crude oil and the so-called production ‘Revolution’ hoopla with Chris Martenson’s (Peak Prosperity).

Gregor makes the point that the increase in crude prices after 1998 took a lot of analysts by surprise. Many predicted a decline to historical levels with drillers simply adding to output from inventory. This is a critical idea that remains in force to this day: that crude production is essentially low-cost, that crude is mis-priced, that manipulation is forcing prices higher, that prices will return to historical levels once manipulators are ‘surgically removed’ from the marketplace.

A fundamental principle of industrial modernity is oil can be wasted because it is cheap, it’s cheap because the only thing it’s good for is waste. The waste process is monetized, it is collateral for loans which ratchet the wasting process further along. After we borrow the first time, we borrow additional amounts in order to waste more as well as to service and roll-over the previous rounds of loans … Both the loans and the waste compound exponentially along with pressure on resources, the entire economy becomes saturated with debts and waste products while resources are exhausted.

What’s there not to like?

Problems emerge when crude oil is depleted and it becomes too costly to waste. If oil isn’t ‘waste-ably cheap’ customers cannot afford it, if the crude is not costly enough there are no returns for the driller. Our economic infrastructure has been built assuming cheap petroleum into the far distant future, our empire of ‘stuff’ is stranded by the high-priced variety … meanwhile, costly, difficult to extract crude is all that remains! Cost is the reef upon which the modern world has run aground: there isn’t enough margin remaining after paying the fuel bill to offer as collateral for new loans or to service debts … the fuel bill has to be very high or there is no more fuel!

A hundred years into the petroleum era and there are no ‘innovative’ scalable economic uses for crude other than to burn it! Despite massive conversion losses, cheap oil provides energy returns sufficient to support current living standards, not-wasting under the current regime doesn’t provide anything. Because of the absence of imagination and a shortage of high-cost/real value uses, the exhaustion of low-cost crude means the end of waste-based modernity: there is no ‘Plan B’.
Triangle of Doom 012113

Figure 1: From TFC Charts, continuous Brent monthly contract (click on for big). The top line represents what customers are able to pay, above that price there are no petroleum sales and price must decline as producers holding petroleum products cut their losses. The bottom line represents the ‘floor’ price that drillers must receive otherwise they cannot afford to bring new crude oil to the marketplace. There are a few things to keep in mind at all times:

– Since 2000, each incremental dollar (euro, yen or other currency) produces less crude than the dollar before. That is, today’s dollar produces less crude than yesterday’s dollar, tomorrow’s dollar will produce less crude than today’s. What is important is the relationship between the real cost of gaining fuel relative to the ability of the customers to meet this cost. This relationship is driven by the need of the driller to spend more in order to return less: this is net energy, it is currently declining, at some point net energy will become negative, that is, the use of energy will not provide returns, in the form of credit, sufficient to bring new energy supplies to the market.

– The gross amount of incremental credit available is the amount that the so-called customers are able to service at any time of roll-over credit that the establishment can cajole from lenders including central banks over a period of time. This incremental ‘serviceability’ or productivity of debt is decreasing … due to the negative feedback effects of high crude prices over time. See Charles A. S. Hall: ‘discretionary’ spending declines because more funds are diverted toward obtaining energy and away from the consumption of other goods and debt service, (PDF warning) Even though finance is creating more credit, that added credit is bringing less crude to the marketplace.

– It doesn’t matter how many discretionary dollars the establishment is able to cajole: at all times, the producer’s dollar is the same as the consumer’s dollar! Alternatively, the gallon of diesel fuel used by the driller is the same gallon (identical energy density) burned by the customer.

A change of the customer’s condition will have an adverse effect on the driller. The customer’s leverage or ability to borrow is increased at the expense of the driller’s leverage … and vice-versa … This is because money represents the same ‘energy cost’ to both.

Currency is nothing more than a proxy for the fuel used by the customer … which is the same fuel required by the driller to bring more crude into the marketplace. The driller cannot use one kind of dollar to gain fuel while the customer uses a different kind to waste the fuel.

Because modern ‘labor’ is waste, the customer must borrow … or some firm or institution must borrow for him. Gregor suggests workers were able to gain greater amounts in wages in the past when fuel was less costly: wages are credit, high wages represent the historical productivity of credit. Prices cannot rise further because the ability of customers to earn (borrow) is constrained by (relatively) high crude prices, the productivity of credit is diminished.

There are two sets of borrowers: customers and drillers. Both need to borrow to gain fuel. It costs more for the driller because he is constrained by geology while the customer is limited only by access to credit itself/wasting infrastructure. The relationship between the sets of borrowers conforms to game theory:
Crude Game Theory 1

Figure 2: Energy relationships in 1998 and prior, drillers and customers each borrow or don’t borrow. Not borrowing by either meant no economy and no petroleum produced which obviously did not occur. Both customers and drillers chose to borrow: drillers added to excess petroleum capacity making fuel more affordable. Customer borrowing became added gross domestic product (GDP). This amplified driller borrowing which made even more crude available at still lower prices!

There was no need to allocate between drillers or customers, they could ‘have it all’: by March, 1999 the world was …


Economist Cover 1

The famous cover for the Economist Magazine: it was an ugly cover … it was also incorrect about the future.

From 1998 onward, the productivity of each dollar invested in crude production over time has continually declined. This is the basis for the argument that Peak Oil occurred in 1998: that the baleful economic effects predicted to occur after Peak Oil started to be felt in 2000. To gain more crude oil drillers were required to add more wells, each well was more costly than the last, each well offered less crude oil than previous wells: the effect of this effort has been felt by oil consumers who have had to compete with the drillers for each dollar of credit.
Crude Game Theory 2

Figure 3: Post-1998, brutal new game, new mutually-assured-destruction theory!

Borrowing by customers returns less GDP, borrowing by drillers returns less crude. When drillers borrow alongside their customers, they cannot keep pace because demand is easier to create than supply: automobiles are more easily had than new oil fields. Attempting to add to GDP (borrowing by customers) increases demand for crude which exhausts inexpensive fields faster, this in turn adds to the credit requirements of the drillers.

– When drillers borrow alongside customers for diminished return, borrowing costs pyramid. The outcome is the same as when neither drillers nor customers borrow, there is no economy, all are bankrupted by credit costs.

– The choice is for the customer to borrow at the expense of the driller or the other way around. Both customer and driller must compete for the same credit dollar: one gains at the expense of the other. The customers’ need for funds is absolute, they must borrow more than drillers or they cannot buy anything and there is no GDP growth. Drillers need for funds is absolute, they must borrow more than the customers otherwise there is less fuel for the customers:
Bakken 012013

Figure 4: Bakken output declines by Darwinian: when drillers cannot borrow, local oversupply of crude cannot be sold to meet costs, the drillers retire drilling rigs. Meanwhile, Bakken wells deplete rapidly, there is no way for drillers to ‘catch up’ after they have stopped drilling. If crude is not affordable now it will be less affordable — to both customers and drillers — tomorrow.

A few more things to keep in mind as we descend into the net-energy rat hole:

– Oil prices can only decline as there is diminished returns on each energy dollar … diminished GDP, diminished credit availability, diminished ability to meet ever-higher real extraction costs. Real energy costs will increase relative to the ability to meet them … even when nominal costs decline. The result is a net-energy death spiral or ‘energy deflation’ similar to Irving Fisher’s Debt Deflation. Whatever the fuel price happens to be at any given time it is too high. The price falls to meet the market, but fuel is removed from the market because of the drop in price, the ongoing shortage reduces the ability of customers to meet the price which is still too high … etc. The ‘real’ price of petroleum becomes higher over time accelerated by inadvertent ‘conservation by other means’.

– The inability of drillers to meet costs or to borrow sufficiently is illustrated by Royal Dutch Shell’s pathetic efforts to drill exploratory wells in the Chukchi and Beaufort Seas, (Rolling Stone):


The year closed on a particularly low note when, on New Year’s Eve, the Kulluk – one of two drilling rigs Shell sent to the Arctic – broke free from its tow ship in rough weather and ran agroundon the rocky coast of Stikalidak Island while carrying more than 150,000 gallons of diesel. But even before this mishap, the experiment had already been a severe disappointment to the company. In July, the Kulluk’s sister ship, the Noble Discoverer, slipped its anchorage and narrowly avoided a similar fate. Construction problems and equipment failures delayed drilling; just a day after work finally began in September, the Noble Discoverer had to stop again to make way for an incoming ice floe more than 30 miles long. An oil spill containment dome failed a required safety inspection, “crushed like a beer can” by underwater pressure. The Coast Guard, which is already investigating the Noble Discoverer for criminally inadequate pollution and safety controls, is now launching an investigation of the Kulluk incident. And in further bad news for Shell (and the Arctic), the Environmental Protection Agency announced yesterday that both the Kulluk and the Noble Discoverer repeatedly violated the Clean Air Act during the 2012 season.


The Kulluk is a 30-year old drilling barge that had been mothballed for 20 years before being brought back into service, the Noble Discoverer is 37-year old rust-bucket intended for duty in the relatively placid Gulf of Mexico. Shell’s Arctic effort is an improvised, cost- and corner-cutting jury rig rather than a serious effort, which would cost tens of billions of dollars and require many years of preparation that Shell seems unwilling to invest.

– Pretty much all the oil that has been- recovered since 1858 has been wasted in automobiles and to fight wars. When shortages appear, the contestants for the oil that remains will be militaries and drivers.

– When net energy becomes negative — when the cost to extract oil cannot be met by the customer — there will be physical shortages. These shortages will be permanent: oil that cannot be afforded by customers in the present will not be magically affordable when these customers are poorer in the future. There will be no further rationing by access to credit, reduced amounts of oil will not deliver additional credit.

– Oil producing states tend to be autocratic: look for Norway, Denmark, the US, Canada and Mexico to become single-party states like Saudi Arabia or Iran. Because of autocrats ability to control access to energy, they will gain ascendancy with their populations’ eager consent. What is at stake for Americans and the West is democracy itself: a choice between the right to have a say in our own affairs versus the false-promises of energy-driven ‘prosperity’ offered by autocrats … the choice between driving a car or having a functioning republic.

– Oil shortages will manifest themselves as food shortages: even though there is likely to be plenty of food in general, there will be areas without food due to distribution problems.

– The time frame is less than two years then the world becomes net energy negative. At that point there is no turning the clock back. Not every oil producing region is showing diminished returns, these exceptions are the remaining large conventional fields that offer equal- or greater returns for each energy-dollar invested in them. At current rates of draw, these fields are being depleted rapidly. It is not necessary to note the field or the rate of decline, only to note the price of crude relative to the ability of the customer to meet that price. The time that remains to our current way of doing business is how long it takes for these last conventional fields to decline.

– This in turn is the time remaining to ‘prepare’: to move yourself or your family to a more pleasant place, to become an activist, to find a less petroleum-dependent job, to learn a post-petroleum skill or gain a post-petroleum avocation. When the US becomes net energy negative, the amounts of fuel available will diminish sharply. So to will be the ability of ordinary citizens to access that fuel … this will be so until a new allocation regime is in place, likely to be some form of hard rationing. In the new regime, the only citizens that will be free from the reach of authorities will be those who do not use fossil fuels or petroleum at all.

EDIT: Coal, nuclear, hydro-power, solar and wind, natural gas and other prime movers are dependent upon cheap, plentiful supplies of petroleum to power the necessary ships, trucks, trains and other forms of transportation. When supplies of petroleum diminish (finger cutting across throat gesture).


Knarf plays the Doomer Blues

Support the Diner
Search the Diner
Surveys & Podcasts


Renewable Energy


" As a daily reader of all of the doomsday blogs, e.g. the Diner, Nature Bats Last, Zerohedge, Scribbler, etc… I must say that I most look forward to your “off the microphone” rants. Your analysis, insights, and conclusions are always logical, well supported, and clearly articulated – a trifecta not frequently achieved."- Joe D
Global Diners

View Full Diner Stats

Global Population Stats

Enter a Country Name for full Population & Demographic Statistics

Lake Mead Watch


Inside the Diner

Louis Vuitton luxury hangbags sit after manufacture at the workshop in Beaulieu-sur-Layon, France.The U.S. is set to go after beauty and luxur...

4 days ago I parked my car and went inside. The next day it would not even turn over.    It is a 1997 Toyota Corolla with  180,000 miles. We bought it for $5 from a relative about 5 years ago. I really have liked this car. "Auto experts and owners ali...

 The record-setting heat wave that swept through Arctic Siberia in June has yielded a wide-range of deleterious effects in the expansive polar and sub-polar regi... of U.S. scramble to shut down as countr...

Recent Facebook Posts

No recent Facebook posts to show

Diner Twitter feed

Diner Newz Feeds
  • Surly
  • Agelbert
  • Knarf
  • Golden Oxen
  • Frostbite Falls

I found this on a friend's Facebook page. It [...]

Doomstead Diner Daily July 11The Diner Daily is av [...]

Quote from: UnhingedBecauseLucid on March 18, 2019 [...]

CleanTechnicaSupport CleanTechnica’s work via dona [...]

QuoteThe FACT that the current incredibly STUPID e [...]

Quote from: K-Dog on February 24, 2020, 06:23:52 P [...]

I wonder how much these coins have been debased? [...]

Precious tip of the day.....Buy silver NOW  She [...]

Scientists have unlocked the power of gold atoms b [...]

Quote from: azozeo on August 14, 2019, 10:41:33 AM [...]

I am OUT of Jury Service!  I got summoned to be a [...]

Quote from: Eddie on May 16, 2020, 10:30:30 AMQuot [...]

Quote from: RE on May 16, 2020, 08:20:06 AMQuote f [...]

Quote from: RE on May 16, 2020, 08:20:06 AMQuote f [...]

Alternate Perspectives
  • Two Ice Floes
  • Jumping Jack Flash
  • From Filmers to Farmers

The Flim-Flam Men by Cognitive Dissonance   I suspect if average Joe or Jane were asked to identify [...]

The Coming War With China Re-posted from   (Have you noticed that (suddenly) Ch [...]

Papers Please! By Cognitive Dissonance     For those who may not know, Mrs. Cog and I live in the mo [...]

Lies, Damn Lies and Coronavirus Statistics By Cognitive Dissonance     “Never believe anything in po [...]

The Decline and Fall of Civil Society Chapter One By Cognitive Dissonance     From my perspective at [...]

Event Update For 2020-07-09 [...]

Event Update For 2020-07-08 [...]

Event Update For 2020-07-07 [...]

Event Update For 2020-07-06 [...]

Event Update For 2020-07-05 [...]

However don't expect strikes and yellow vests to fix underlying problems [...]

So how many more times are we going to hear that this is our last chance to take action in order to [...]

This is definitely not a bona fide post [...]

Daily Doom Photo


  • Peak Surfer
  • SUN
  • Transition Voice

The Great Pause Week 16: Cash Bounties for Scalps"The word “redskin” has been coined to refer to these trophies."Paris, June 15, 1756. Anti [...]

The Great Pause Week 15: Pirata"The white gull can bank steeply, climb, dive, and even invert, but it lacks by a large margin [...]

"The blow felt by a globalized, just-in-time, cheap-energy driven, modern consumer economy will [...]

"There are ten million times more viruses on Earth than there are stars in our universe."H [...]

The Great Pause Week 11: Son of a Lab Rat"Humans, by and large, seem unshakable in their beliefs that skin color, religious affiliation, [...]

The folks at Windward have been doing great work at living sustainably for many years now.  Part of [...]

 The Daily SUN☼ Building a Better Tomorrow by Sustaining Universal Needs April 3, 2017 Powering Down [...]

Off the keyboard of Bob Montgomery Follow us on Twitter @doomstead666 Friend us on Facebook Publishe [...]

Visit SUN on Facebook Here [...]

What extinction crisis? Believe it or not, there are still climate science deniers out there. And th [...]

My new book, Abolish Oil Now, will talk about why the climate movement has failed and what we can do [...]

A new climate protest movement out of the UK has taken Europe by storm and made governments sit down [...]

The success of Apollo 11 flipped the American public from skeptics to fans. The climate movement nee [...]

Today's movement to abolish fossil fuels can learn from two different paths that the British an [...]

Top Commentariats
  • Our Finite World
  • Economic Undertow

In reply to Dan. GDPnow says Q2 is down 35.5%. regai [...]

In reply to Kim. what ? where do you find the time for that? [...]

In reply to Gail Tverberg. During the great recession the economy was running at 95 percent capacity [...]

In reply to Tim Groves. Yes, there are not only physical disabilities, but also various psychiatric [...]

In reply to Tim Groves. sure, and maybe tomorrow I'll read something else and turn into a Doome [...]

I don't get it. For years this blogger and others like Martenson have been on about the fragili [...]

In reply to steve from virginia. This Brookings webinar goes over some of the ground discussed here [...]

In reply to Ken Barrows. Everything is bullish! [...]

Also, it's very possible we could send the virus packing if everybody would just wear a face-ma [...]

The crux of the problem is that what Chris Martenson has christened the "Honey Badger Virus [...]

RE Economics

Going Cashless

Off the keyboard of RE Follow us on Twitter @doomstead666...

Simplifying the Final Countdown

Off the keyboard of RE Follow us on Twitter @doomstead666...

Bond Market Collapse and the Banning of Cash

Off the microphone of RE Follow us on Twitter @doomstead666...

Do Central Bankers Recognize there is NO GROWTH?

Discuss this article @ the ECONOMICS TABLE inside the...

Singularity of the Dollar

Off the Keyboard of RE Follow us on Twitter @doomstead666...

Kurrency Kollapse: To Print or Not To Print?

Off the microphone of RE Follow us on Twitter @doomstead666...


Off the microphone of RE Follow us on Twitter @doomstead666...

Of Heat Sinks & Debt Sinks: A Thermodynamic View of Money

Off the keyboard of RE Follow us on Twitter @doomstead666...

Merry Doomy Christmas

Off the keyboard of RE Follow us on Twitter @doomstead666...

Peak Customers: The Final Liquidation Sale

Off the keyboard of RE Follow us on Twitter @doomstead666...

Collapse Fiction
Useful Links
Technical Journals

Globally, subtropical circulation in the lower troposphere is characterized by anticyclones over the [...]

Numerical models are being used for the simulation of recent climate conditions as well as future pr [...]

This study aims to provide improved knowledge and evidence on current (1986–2015) climate vari [...]

In many countries, urban heat island (UHI) effects come along with urbanization in metropolitan area [...]

Follow on our