An Energy and the Economy Forecast for 2025

Posted on January 5, 2025 by Gail Tverberg

As the world enters 2025, the critical issue we are facing is Peak Crude Oil, relative to population. Crude oil has fallen from as much as .46 gallons per person, which was quite common before the pandemic, to close to .42 gallons per person recently (Figure 1).

Figure 1. World crude oil production per person, based on data of the US EIA. Data through September 2024.

People have a misimpression regarding how world peak oil can be expected to behave. The world economy has continued to grow, but now it is beginning to move in the direction of contraction due to an inadequate supply of crude oil. In fact, it is not just an inadequate crude oil supply, but also an inadequate supply of coal (per person) and an inadequate supply of uranium.

We know that when a boat changes direction, this causes turbulence in the water. This is similar to the problems we are currently seeing in the world economy. Physics dictates that the economy needs to shrink in size to match its energy resources, but no country wants to be a part of this shrinkage. This indirectly leads to major changes in elected leadership and to increased interest in war-like behavior. Strangely enough, it also seems to lead to higher long-term interest rates, as well.

In this post, I share a few thoughts on what might lie ahead for us in 2025, in the light of the hidden inadequate world energy supply. I am predicting major turbulence, but not that things fall apart completely. Stock markets will tend to do poorly; interest rates will remain high; oil and other energy prices will stay around current levels, or fall.

[1] I expect that the general trend in 2025 will be toward world recession.

With less oil (and coal and uranium) relative to population, the world can be expected to produce fewer goods and services per person. In some sense, people will generally become poorer. For example, fewer people will be able to afford new cars or new homes.

This trend toward lower purchasing-power tends to be concentrated in certain groups such as young people, farmers, and recent immigrants. As a result, older people who are well-off or firmly established may be able to mostly ignore this issue.

While the shift toward a poorer world has partially been hidden, it has been a huge factor in allowing Donald Trump to be voted back into power. Major shifts in leadership are taking place elsewhere, as well, as an increasing share of citizens become unhappy with the current situation.

[2] Many governments will try to hide recessionary tendencies by issuing more debt to stimulate their economies.

In the past, adding debt was found to be effective way of stimulating the world economy because energy supplies supporting the world economy were not seriously constrained. It was possible to add new energy supplies, quite inexpensively. The combination of additional inexpensive energy supplies and additional “demand” (provided by the added debt) allowed the total quantity of goods and services produced to be increased. Once energy supplies started to become seriously constrained (about 2023), this technique started to work far less well. If energy production is constrained, the likely impact of added debt will be added inflation.

The problem is that if added government debt doesn’t really add inexpensive energy, it will instead create more purchasing power relative to the same number, or a smaller number, of finished goods and services available. I believe that in 2025, we are heading into a situation where ramping up governmental debt will mostly lead to inflation in the cost of finished goods and services.

[3] Energy prices are likely to remain too low for fossil fuel and uranium producers to raise investments from their current low levels.

Recession and low prices tend to go together. While there may be occasional spikes in oil and other energy prices, 2025 is likely to bring oil and other energy prices that are, on average, no higher than those of 2024, adjusted for the overall increase in prices due to inflation. With generally low prices, producers will cut back on new investment. This will cause production to fall further.

[4] I expect “gluts” of many energy-related items in 2025.

Gluts are related to recession and low prices for producers. The underlying problem is that a significant share of the population finds that finished goods, made with energy products and investment at current interest rates, are too expensive to buy.

Even farmers are affected by low prices, just as they were back at the time of the Great Depression. We can think of food as an energy product that is eaten by people. Farmers find that their return on farm investment is too low, and that their implied wages are low. Low income for farmers around the world feeds back through the system as low buying power for new farm equipment, and for buying goods and services in general.

In 2025, I expect there will be a glut of crude oil due to a lack of purchasing power of many poor people around the world. My forecast is similar to the forecast of the IEA that predicts an oversupply of oil in 2025. Also, a December 2024 article in mining.com says, “A glut of coal in China is set to push falling prices even lower.”

Even wind turbines and solar panels can reach an oversupply point. According to one article, number of Chine solar panel builders seems to be far too high for world demand, leading to a potential shake out. As the share of wind and solar power added to the electric grid increases, the frequency of low or negative payment for wholesale electric power increases. This makes adding more wind turbines and solar panels problematic, after a certain point. We don’t yet have a cost-effective way of storing intermittent electricity for months on end. This seems to be part of the reason why there recently were no bidders for producing more offshore wind power in Denmark.

[5] I expect long-term interest rates to remain high. This will be a problem for new investments of all kinds and for governmental borrowing.

In Section 2 of this post, I tried to explain that a peak-oil impact is likely to be inflation. This occurs because ramping up debt to try to stimulate the economy no longer works to get additional cheap energy products from the ground. Instead of getting as many finished goods and services as hoped for, the added debt tends to produce inflation instead.

I believe that we are reaching a stage of fossil-fuel depletion where it is becoming increasingly difficult to ramp up production, even with added investment. Because of the added debt added in an attempt to work around depletion, inflation in the price of finished goods and services can be expected. Investors are beginning to see long-term inflation as a likely problem. As a result, they are starting to demand higher long-term interest rates to compensate for the expected decrease in buying power.

Figure 2. Interest rates on 10-year US Treasury Securities, in a chart by the Federal Reserve of St. Louis. Data is through December 30, 2024.

Figure 2 shows that US long-term interest rates have varied widely. There was a period of generally dropping long-term interest rates from 1981 to 2020. Starting in late 2020, interest rates began to rise; in 2023 and 2024 they have been in the 4% to 5% range. These relatively high rates are occurring because lenders are demanding higher long-term interest rates in response to higher inflation rates.

Because of inflationary pressures, I expect that long-term interest rates will tend to stay at today’s high level in 2025; they may even rise further. These continued high interest rates will become a problem for many families wanting to purchase a home because US home mortgage rates rise and fall with US 10-year interest rates. Often families are faced with both high home prices and high interest rates. This combination makes mortgage costs a problem for many families.

Governments are also adversely affected. They tend to hold large amounts of debt that they have accumulated over a period or years. Up until 2020, much of this added debt often was at a very low interest rate. As more long-term debt at higher interest rates is added, annual interest rate payments tend to rise rapidly. This can cause a need to raise taxes. Japan, especially, would be affected by higher interest rates because of its high level of government debt, relative to GDP.

Higher interest rates will also raise costs for citizens trying to finance the purchase of homes, and for investors wanting to build wind turbines or solar panels. In fact, investment in any kind of factory, pipelines, or electricity transmission will tend to become more expensive.

In a sense, we seem to be seeing the peak oil problem shifting in a way that affects interest rates and the economy in general. Either higher interest rates or higher oil prices will tend to push the economy toward recession. We tend to look for rising prices to signal an oil supply problem, but perhaps that only works when there is excessive demand. If the problem is really inadequate oil supply, perhaps we should look for higher long-term interest rates, instead.

[6] Industry around the world is likely to be hit especially hard by recessionary tendencies.

Industry requires investment. Higher interest rates make new industrial investment more expensive. Industry is also a heavy user of energy products. Putting these observations together, it shouldn’t come as a surprise if new industrial investment is one of the first places to be cut back because of peak oil supply.

Figure 3. Expected world industrial output, based on calculations I made with using industrial output and population forecasts from detailed output data provided with the article Recalibration of limits to growth: An update of the World3 model” by Arjuna Nebel et al.

The original 1972 Limits to Growth analysis, in its base model, suggested that resources would start to run short about now. The variables in this model were recently recalibrated in the article, “Recalibration of limits to growth: An update of the World3 model.” Based on the detailed data given in the endnotes to the article, I calculated the expected industrialization per capita shown in Figure 3.

Based on Figure 3, this model shows that industrialization per person reached a peak in 2017. Peak industrialization (total, not per capita) occurred in 2018, which coincides with peak crude oil extraction (not per capita).

The model seems to suggest that after an inflection point in 2023 (that is 2024 and after), industrialization will start to fall more steeply. The model shows a decrease in production per capita of 4.1% in 2024 and of 5.3% in 2025. Such decreases would push the world economy toward recession.

The model suggests that people, on average, are getting poorer in terms of the quantity of goods and services they can afford to buy. New cars, motorcycles, and homes are becoming less affordable. Heavily industrialized countries, such as China, South Korea, and Germany are likely to be especially affected by headwinds to industrialization. I expect that the economic problems in these countries will continue and are likely to worsen in 2025.

[7] The US has tried to isolate itself from this nearly worldwide recession. I expect that during 2025, the US will increasingly slip into recession, as well.

There are several reasons for this belief:

(a) The US is heavily dependent upon imports of raw material. China is restricting exports of critical minerals used by the US. This will make it very difficult or impossible to ramp up high tech industries as planned.

(b) The US is heavily dependent on Russia for supplies of enriched uranium. Any plan for added nuclear electricity needs to consider where the uranium to power these plants will come from. It also needs to consider how this uranium will be enriched to the required concentration of uranium-235.

(c) If the US can ramp up crude oil and natural gas production, this can perhaps counter this trend toward US and world recession. Unfortunately, recent US oil supply has not been ramping up; instead its production has been fairly flat. Natural gas production has actually been lower since February 2024. Plans have been made to rapidly ramp up US liquefied natural gas (LNG) exports, but these plans cannot work if the US natural gas supply is already decreasing.

(d) The US government has had an advantage in borrowing because the US dollar is the world’s reserve currency. As such, the US is, in some sense, the first borrower, pulling the rest of the world along. The US, by making its short term interest rates higher than those of many other countries, was able to largely escape recession 2023 and 2024. Additional investment was attracted to the US by these higher interest rates. But the US cannot follow this strategy indefinitely. For one thing, a high US dollar handicaps exports. For another, interest costs on government debt become burdensome.

(e) Donald Trump has plans to close inefficient parts of government. These changes, if enacted, will reduce “demand” within the economy because workers in these sectors will lose their jobs. Over the longer term, these changes might be beneficial, but over the short term, they are likely to be recessionary.

(f) It is difficult for the US to do much better than the rest of the world. If the rest of the world is in recession, the US will tend to head in that direction, as well.

[8] I expect more conflict in 2025, but today’s wars will not look much like World War I or World War II.

Today, not many countries are able to build huge fleets of fighter airplanes. Even building drones and bombs seems to require supply lines that extend around the world. So, instead, wars are being fought in non-military ways, such as with sanctions and tariffs.

I expect that this trend away from direct military conflict will continue, with more novel approaches such as internet interference and stealth damage to infrastructure taking place instead.

I do not expect that nuclear bombs will be used, even when there is direct conflict between powerful adversaries. For one thing, uranium in these bombs is needed for other purposes. For another, there is too much chance of retaliation.

[9] I expect many types of capital gains will be low in 2025.

The situation we are facing now is the opposite of the drop in long-term interest rates observed between 1981 and 2020, in Figure (2), above. This historical drop in interest rates made it possible for businesses to more easily finance new investments. It also made it possible for individual citizens to be able to afford more homes and cars. It should not be surprising that this period has been a time of rising stock market prices, especially in the United States.

The world’s economic problem is that it no longer has the tailwind of falling long-term interest rates. Instead, rising long-term interest rates are becoming a headwind. Home prices are un-affordably high for most potential buyers at today’s interest rates. A similar problem faces those hoping to purchase agricultural equipment and farmland at today’s high prices and high interest rates.

We should not be surprised if home and farm prices stabilize and begin to fall. Prices of shares of stock are likely to encounter similar headwinds. Prices of derivative investments may perform even worse than the shares themselves.

Recently, a great deal of the strength of the US market has been in a few stocks. Artificial Intelligence (AI) needs to very quickly provide a lot of benefit to the stock market as a whole for this to change. I cannot imagine this happening. With the US slipping toward recession, I expect that the US stock market will at best plateau in 2025.

[10] With less energy available and higher interest rates on government debt, I expect to see more government organizations disbanding.

It takes energy, directly and indirectly, to operate any kind of governmental organization. Eliminating governmental organizations is one way of saving energy. This is what happened when the central government of the Soviet Union collapsed in 1991. I would think that parallel kinds of changes could start happening in the next few years, in many parts of the world.

At some time, perhaps as soon as 2025, the European Union could collapse. If things are going badly for many member countries, they will be less willing to support the European Union with their tax revenues. Other organizations that seem like they could be in peril include NATO and the World Trade Organization.

In some ways, such shrinkage would be in parallel with Trump’s plan for eliminating unnecessary governmental organizations within the United States. All these organizations require energy; cutting their number would go some way toward reducing crude oil and other energy consumption.

[11] It is possible that the world economy will eventually get itself out of its apparent trend toward recession, but I am afraid this will happen long after 2025.

We know that the world economy tends to operate in cycles. We would like to believe that the apparent current down-cycle is just temporary, but we can’t know this for sure. Physics tells us that we need energy supplies of the right kind for any action that contributes to GDP. Running short of energy supplies is therefore a very worrisome condition.

We also know that there are major inefficiencies in current approaches. For example, oil extraction leaves much of the oil resource in place. In theory, AI could greatly improve extraction techniques.

We also know that uranium consumption is terribly inefficient. M. King Hubbert thought that nuclear energy using uranium had amazing potential, but most of this potential remains untapped. Perhaps AI could help in this regard, also. If nothing else, perhaps recycling spent fuel could be made less expensive and problematic.

Figure 4. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.

We can’t know what lies ahead. There may be a “religious” ending to our current predicament that we are discounting that is actually the “right story.” Or there may be a “technofix” solution that allows us to avert collapse or catastrophe. But for now, how the current down-cycle will end remains a major cause for concern.

Posted in Financial Implications | 319 Comments

The world economy needs to simplify

Posted on December 4, 2024 by Gail Tverberg

Economic growth and added complexity sound like they would be good, but at some point, the combination gets to be too much–simplification is needed.

Too much of the world’s income starts going to non-working individuals and to high-earning workers in privileged fields. Ordinary working citizens start to say, “Wait a minute, there is not enough left for my everyday expenses. The system needs to change.” Elections lead to the selection of politicians who want war, or who want to overturn the current system. The system then changes in a way that leads to less spending on healthcare and other complexities.

Figure 1. US healthcare expenses as a percentage of GDP, based on data of the US Center for Medicare and Medicaid Services.

In this post, I will try to explain a bit of the underlying problem and give some hints at what the simplification might look like. Part of the problem is too little energy supply. This is a problem that cannot be told to the public; it would be too distressing. In this post, I present the result of a recent academic study that has attempted to recalibrate the findings of the 1972 Limits to Growth study with updated data.

[1] Economies of all types tend to operate in cycles.

Economies need both resources and human participants. Human populations tend to increase in number if conditions are favorable. When population grows, resources per capita, such as arable land and fresh water, tends to fall. Adding complexity helps an economy work around falling resources per capita.

With added complexity, it is possible for resource extraction of many kinds to grow, at least for a time. Deeper wells can sometimes add more fresh water supply. Irrigation and fertilizer can be used to increase crop yields. International trade allows the possibility of getting resources from more distant lands. Adding debt allows factories to be built and to be paid for “after the fact,” using the sales of the goods produced by the factories. Ever-larger governments allow more roads, schools, and services of all kinds.

The use of added complexity helps keep economies growing for a long time, but at some point, things start going wrong. Oil wells and other types of resource extraction become more expensive to build because the easiest to extract resources tend to be used first. Pollution becomes more of a problem. Universities start producing more graduates with advanced degrees than there are job openings paying enough to justify studying for those degrees. Healthcare costs become hugely expensive. Increasing interest on debt becomes a huge burden, both for governments and individual citizens.

When added complexity reaches a limit, citizens sense a problem. They tend to vote the current governments out of power. Or they become rebellious in other ways. I think the world has already reached a complexity limit.

[2] At some point, the added complexity trend needs to shift toward simplification.

When added complexity no longer has sufficient payback, the system seems to sense this and starts pushing economies in the opposite direction. Often, the wages of ordinary workers become too low, relative to the cost of living. They rebel and overthrow their governments. Or central governments may collapse, as the central government of the Soviet Union did in 1991. This happened after oil prices were low for an extended period. The Soviet Union was an oil exporter, depending on oil exports for tax revenue. Revenue from collectivized agriculture was underperforming, also. Thus, getting rid of a layer of government, or too many government programs, seems to be one common theme of simplification.

Another issue today is international trade. Crude oil supplies per capita are low. Somehow, international trade (which uses crude oil) needs to be cut back.

Figure 2. World crude oil production per person, based on data of the US EIA.

With inadequate total oil supplies available, it becomes very desirable to do manufacturing close to home, rather than at a distance. This is a major reason for the competition in manufacturing between the US and China. If the US can manufacture locally, it will provide jobs and save some of the limited world crude oil supply.

Another issue is the oversupply of workers with advanced degrees, relative to the number of jobs requiring such degrees. A study released in early 2024 indicates that only about half of US college graduates are able to obtain a job requiring a college level degree within a year of graduation. In fact, the majority of those who cannot obtain a job requiring a college-level degree within a year after graduation remain underemployed 10 years after graduation. Pretty clearly, the number of college graduates needs to fall.

I showed in Figure 1 that US healthcare costs are very high, but they have recently been on a plateau. Perhaps these high healthcare expenses might make sense if US life expectancies were longer than elsewhere, thanks to all this spending. In fact, US life expectancy at birth is lower than in any other advanced nation. The CIA Factbook ranks the US life expectancy as 49th from the top in 2024.

Figure 3.

Figure 3 (above) shows a chart I found several years ago, showing how US female life expectancy has been dropping, relative to other high-income countries.

Figure 4.

Figure 4 shows that US life expectancies have continued to fall relative to other advanced economies. Something is clearly going wrong with health in the United States. It is no wonder that Robert F. Kennedy, Jr. wants to “Make America Healthy Again.”

There is also the question of the level of US healthcare spending, relative to GDP. The share for the US, from Figure 1, is about 17%. The shares for the EU, the UK, and Japan are each about 11% according to the World Bank. The share for Russia is about 7%; for China it is about 5%.

Another issue mentioned in the introduction is the proportion of government spending that goes toward non-working individuals. The chart below shows how US Federal Government funds are spent. When the budget is prepared, often many of these programs are lumped together as “Mandatory Spending,” so we don’t see precisely what the spending is for.

Figure 5. How US Federal Government spending was split in the fiscal year ended September 30, 2023, according to a chart by the Center on Budget and Policy Priorities.

Typically, the arguments about spending are on the parts of the budget other than mandatory spending. The problem is that all parts need to be funded, one way or another. Social Security describes its program as largely pay as you go. Mostly, the payroll taxes collected from today’s workers are used to pay benefits to today’s recipients. 

Keeping the system working as it does today becomes a problem if the total amount of goods and services produced starts falling at some point. For example, if the total food supply at some point (say 2050) becomes too low, there is a question regarding which citizens should get inadequate food rations: the workers, or those receiving benefits under a pension program for the elderly. I would vote for the workers getting adequate food, if we expect them to continue to work. This issue suggests that at some point, the elderly may have to go back to work to get an adequate share of what is being produced.

[3] I see the results of the recent US presidential election to be a call for simplification: getting rid of the unneeded pieces of the system.

Donald Trump and his team clearly have a much different view of how the government should be operated than Joe Biden did. In particular, the new team would like to get rid of what they see as unneeded parts of the system.

There seem to be many other parts of the world encountering somewhat similar political and funding difficulties. Germany is dealing with a collapse of government. France is facing political and budget crises. Even China’s economy is having huge difficulties.

[4] I see the underlying problem as not enough resources, especially energy resources, for the rising world population.

It is not only oil that is in short supply (Figure 2); coal is also in short supply, relative to world’s population (Figure 6).

Figure 6. World coal consumption per capita, based on data of the 2024 Statistical Review of World Energy, produced by the Energy Institute.

Uranium is in short supply, as well. The issue for uranium is that the world’s supply of nuclear warheads that could temporarily serve as a supplement to currently mined uranium is running short. These warheads belonged primarily to the US and to Russia, but Russia has sold a substantial amount of its warheads to the US, to be down-blended for use in nuclear power reactors.

Figure 7. Chart from ArmsControl.org showing estimated global nuclear warhead inventories, 1945 to 2023.

Without enough energy resources per person, the world will likely need to produce fewer goods and services in total. Some uses for energy products, and for the goods and services that can be made with energy products, need to disappear.

Now, all parts of the world need to re-examine energy uses that are currently being made and look for uses that the economy can most easily get along without. For example, the step-down in oil consumption per capita that occurred in 2020 seems to be still having some effect. Some people are still working from home, saving oil that would be used for commuting. Some long-distance airline flights were eliminated, as well, particularly in Asia, reducing jet fuel consumption.

The self-organizing economy tends to push the world in the direction of contraction. How this will work is not at all clear. Most people didn’t understand the response to Covid-19 as a way to cut back oil consumption. It is possible that future changes will, to some extent, come from cutbacks directed by government organizations that are as difficult to understand as the Covid-19 restrictions.

[5] The book The Limits to Growth, published in 1972, modeled when world resources would run short, relative to growing world population. A recent analysis provides updated estimates, using the same model.

The original 1972 analysis, in its base model, suggested that resources would start to run short about now. An article called, “Recalibration of limits to growth: An update of the World3 model” by Arjuna Nebel and others was published earlier this year in the Journal of Industrial Ecology. The summary exhibit of their findings is shown here as Figure 8.

Figure 8. Output of recalibrated Limits to Growth model, with Gail Tverberg’s labels showing which lines are “Industrial Output” and “Population.” Source.

On Figure 8, Recalibration23 is the name given to the new model output. The BAU dotted line shows the indications from the base (business as usual) 1972 model. I found the coloring a little confusing, so I added the labels “Industrial Output” and “Population” to better mark what I consider the two most important model outputs. Food Production per capita is the green line, which is also important. The calculations are all made in terms of the weight of physical quantities of materials used, for the world as a whole. The financial system is not modeled.

We do not know how accurate a forecast such as this is. I know that Dennis Meadows, who was the leader of the 1972 Limits to Growth analysis, has said that once peak was reached, we could not expect the model to necessarily hold.

Even with this caveat, I find this forecast disturbing. Industrial output per capita (which would include things like automobiles, farm machinery, and computers) is shown as already steeply declining by 2025 in the updated model. This trend is much clearer than in the 1972 model. By 2050, industrial output per capita is a small fraction of the amount it was at peak.

Food output per capita is shown to start dropping about 2025. Based on my understanding of the 1972 Limits to Growth analysis, this change might reflect a shift away from meat-eating, rather than simply fewer total calories per person.

World population follows a curve similar to that of the 1972 Limits to Growth analysis with a peak in world population at perhaps about 2030.

In the updated model, pollution has been modeled as CO2 levels. This is different from the mix of pollutants used in the original model. The peak comes around 2090.

[6] Intuitively, the order of forecast changes for the world economy, shown in Figure 8, seems right to me.

Figure 8 indicates that world industrial production is expected to be the first type of output to drop. This makes sense if energy supply is quite limited or is high-priced. Without adequate inexpensive energy supply, a country is likely to cut back on manufacturing its own goods. Instead, it tries to buy from countries with less expensive sources of energy supply.

For example, US industrial production per capita has been falling since 1973. The year 1973 was the year when oil prices first spiked. US business leaders realized that changes were needed: A larger share of manufactured goods needed to be imported from countries with lower-cost fuel supply. Oil needed to be used sparingly because of its high cost. Coal, used heavily in Asia, was typically much cheaper.

Figure 9. US industrial energy consumption per capita, based on data of the EIA.

China took the lead in industrial production after it joined the World Trade Organization in 2001, but now it is running into obstacles. One issue is that China’s contribution to the world’s supply of goods is taking away high-paying jobs from other countries. Other countries are left with more low-paying service jobs. A second issue is that the US has become dependent upon China for critical materials, such as those used in military armaments. A third issue is that a great deal of China’s growth was financed by debt. As long as China’s exports were growing very rapidly, this was not a problem. But as growth has slowed, China’s debt has become difficult to repay with interest.

The level of conflict between China and other countries has grown, in part because it has become clear that it is not possible for industry to grow rapidly both in China and elsewhere, indirectly because of fossil fuel and uranium limits. The US applies sanctions against some Chinese companies and China retaliates by hoarding scarce resources. These include minerals such as antimony, tungsten, gallium, germanium, graphite, and magnesium.

The world is increasingly operating in a “not enough to go around” mode for scarce resources. At the same time, countries need to somewhat get along. So we get strange narratives in the press giving rationalizations for actions by both sides, without mentioning the shortage issue.

Figure 8 shows that once industrialization drops, food production also begins to fall, but not as quickly. This makes sense because everyone recognizes that food is essential. The falling calories likely reflect people increasingly moving from meat to vegetable products.

Somehow, world population becomes poorer, but the level of population does not drop nearly as rapidly as the drop in industrialization.

[7] Simplification is likely to take place in significant steps, perhaps at the time of strange events, such as those occurring in 2020.

These are a few ways simplification might take place:

[a] High level government organizations might start disappearing. For example, the European Union might not get enough funding and would stop. Or something similar could happen to the International Monetary Fund or the World Trade Organization.

[b] Programs that we expect to be funded by the US Federal Government might be handed over completely to the states, to be funded or not, as the finances of individual states permit. Examples might include Medicare, Medicaid, and even Social Security.

[c] There could be major banking problems, perhaps simultaneously in many countries around the world. The debt bubble holding up stock markets could pop. Governments would try to compensate, but they might not be able to do enough. Or governments could inadvertently create hyperinflation if there is virtually nothing to buy with the newly printed money created to offset widespread bank failures.

[d] There could be a great deal more sharing of homes and of apartments. The current arrangement of many single people living alone, either in an apartment or a stand-alone house could be replaced by many more roommate situations. Multi-generational families living together may become more common.

[e] Healthcare may become much simpler and local. Instead of seeing an array of specialists at a distance, people may walk to a local health provider. Medications from around the world are likely to drop greatly in quantity. Government programs to care for the seriously disabled elderly seem likely to be scaled back.

[f] Universities may be slimmed down greatly. There is no point in educating a huge number of individuals who cannot get jobs requiring a university degree.

[g] The huge amount of effort that goes into taking care of lawns in the US may disappear. Instead, people will put more effort into growing crops locally. Some people may choose to raise chickens, as well.

[h] International travel for pleasure will likely disappear, except perhaps for the very rich. Even business trips will become very uncommon. The amount of goods and services transported internationally seems likely to shrink.

[i] Many types of optional activities that now take place by car may be replaced by more local versions, which will be reached by walking, or perhaps by bicycle. For example, visits to restaurants may largely disappear, but eating with nearby friends or relatives in homes may increase. Visits to churches may drop greatly, as they did during Covid-19 restrictions, but they may be replaced by groups meeting in homes. Gyms for recreation may disappear, but people may obtain more exercise from their gardens and their need to walk to appointments.

[j] Very strange political leaders may take office. One person rule takes much less energy than transporting many representatives to a central location. Some of these leaders may take over as dictators.

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Nuclear electricity generation has hidden problems; don’t expect advanced modular units to solve them.

Posted on November 11, 2024 by Gail Tverberg

It is easy to get the impression that proposed new modular nuclear generating units will solve the problems of nuclear generation. Perhaps they will allow more nuclear electricity to be generated at a low cost and with much less of a problem with spent fuel.

As I analyze the situation, however, the problems associated with nuclear electricity generation are more complex and immediate than most people perceive. My analysis shows that the world is already dealing with “not enough uranium from mines to go around.” In particular, US production of uranium “peaked”about 1980 (Figure 1).


Figure 1. Chart prepared by the US Energy Information Administration showing US production of uranium oxide.

For many years, the US was able to down-blend nuclear warheads (both purchased from Russia and from its own supply) to get around its uranium supply deficit.

Figure 2. Chart from ArmsControl.org showing estimated global nuclear warhead inventories, 1945 to 2023.

Today, the inventory of nuclear warheads has dropped quite low. There are few warheads available for down-blending. This is creating a limit on uranium supply that is only now starting to hit.

Nuclear warheads, besides providing uranium in general, are important for the fact that they provide a concentrated source of uranium-235, which is the isotope of uranium that can sustain a nuclear reaction. With the warhead supply depleting, the US has a second huge problem: developing a way to produce nuclear fuel, probably mostly from spent fuel, with the desired high concentration of uranium-235. Today, Russia is the primary supplier of enriched uranium.

The plan of the US is to use government research grants to kickstart work on new small modular nuclear reactors that will be more efficient than current nuclear plants. These reactors will use a new fuel with a higher concentration of uranium-235 than is available today, except through purchase from Russia. Grants are also being given to start work on US production of the more highly enriched uranium fuel within the US. It is hoped that most of this highly enriched uranium can come from recycling spent nuclear fuel, thus helping to solve the problem of what to do with the supply of spent fuel.

My analysis indicates that while advanced modular nuclear reactors might theoretically be helpful for the very long term, they cannot fix the problems of the US, and other countries in the West, nearly quickly enough. I expect that the Trump administration, which will start in January 2025, will see this program as a boondoggle.

[1] Current problems with nuclear electricity generation are surprisingly hidden. World electricity generation from nuclear has been close to flat since 2004.

Figure 3. World Nuclear Electricity Generation based on data of the 2024 Statistical Review of World Energy, published by the Energy Institute.

Although there was a dip in world generation of nuclear electricity after the tsunami that affected nuclear reactors in Fukushima, Japan, in 2011, otherwise world production of nuclear electricity has been nearly flat since 2004 (Figure 3).

Figure 4. US Nuclear Electricity Generation based on data of the 2024 Statistical Review of World Energy, published by the Energy Institute.

US nuclear electricity production (Figure 4) shows a similar pattern, except that production since 2021 is down.

[2] The total amount of electricity generated by nuclear power plants is limited by the amount of uranium fuel available to them.

I believe that a major reason why the electricity supply from nuclear has been quite flat since 2004 is because total nuclear electricity generation is limited by the quantity of uranium fuel that is available for the nuclear reactors that have been built.

The price of uranium can perhaps rise, but this doesn’t necessarily add much (or any) supply very quickly. It takes several years to develop a new uranium mine.

In theory, reprocessing of spent fuel to produce uranium and plutonium is also possible, but the amount of that has been performed to date is small. (See Section [6].)

[3] The World Nuclear Association (WNA) published Figure 5 that hints at the world’s uranium supply problem:

Figure 5. World uranium production and reactor requirements (metric tons of uranium) in a chart by the World Nuclear Association.

The black line showing “reactor requirements” (Figure 5) is in some sense comparable to world generation of nuclear electricity (Figure 3). Both figures show fairly flat lines since about 2004. This relationship hints that there has not been a significant improvement in the efficiency of electricity generation using uranium fuel in the past 20 years.

Figure 5 shows a huge gap between the production of uranium from the various countries and “reactor requirements.” The single largest source of additional supply has been down-blended uranium from nuclear bombs. The EIA reports that the US purchased a large number of nuclear warheads from Russia between 1995 and 2013 for this purpose under the Megatons to Megawatts program. The EIA also reports that for the period 2013 to 2022, a purchase agreement was put in place allowing the US to purchase commercial origin low-enriched uranium from Russia to replace some of down-blended nuclear warhead material. In addition, the US had some of its own nuclear warheads that it could blend down. It was the availability of uranium supply from these various sources that allowed US nuclear electricity generation to remain relatively flat in the 2004 to 2023 period, as shown on Figure 4.

The US’s own uranium extraction reached a peak about 1980 and is now close to zero (Figure 1). The world’s supply of warheads is now over 85% depleted, leaving very little stored-away, highly enriched uranium to blend down (Figure 2)

A hidden problem is the fact that uranium production available today is largely from Russia and its close affiliates. The data underlying Figure 5 shows that uranium production in 2022 is dominated by close allies of Russia (55% of the total coming from Kazakhstan (43% of total), Uzbekistan (7% of total), and Russia (5% of total)). The US (at almost 0%), plus production of its close affiliates, Canada and Australia, provided only 24% of world uranium. This imbalance between Russia and its affiliates, and the US and its affiliates, should be of concern.

[4] The current conflict between the US and Russia adds to nuclear problems.

The US is trying to impose sanctions on Russia. The EIA reports:

“The origin of uranium used in U.S. reactors will likely change in the coming years. In May [2024], the United States banned imports of uranium products from Russia beginning in August [2024], although companies may apply for waivers through January 1, 2028.”

This seems to imply that a transition away from Russian uranium dependence must be made in only a little over three years. This is a short time frame, given the difficulty in making such a transition.

EIA data show that in the year 2023, the US sourced only 4.6% of uranium supplies from the US. (This could be partly or mostly down-blended nuclear warheads). Material purchased from Russia comprised 11.7% of uranium. Kazakhstan provided 20.6% of uranium purchased, and Uzbekistan provided 9.5%. Among US allies, Canada provided 14.9%, and Australia 9.2%.

[5] The WNA does not hint at any uranium supply problems.

The WNA is an advocate for nuclear energy; it cannot suggest that there is any problem with uranium supplies. WNA has the opinion that if there is a shortage of uranium, prices will rise, and more will become available. But even if prices rise, it takes several years to bring new mines into operation. Prices need to stay high, or companies will not pursue what appear to be opportunities.

Figure 6. Historical uranium prices in chart by Trading Economics.

Readers of OurFiniteWorld.com have seen that oil prices tend to spike and collapse. They don’t stay high for very long because if prices stay high, the end products made with oil tend to become unaffordable. I expect a similar problem occurs with uranium.

The necessary price threshold for high uranium extraction that is mentioned by the WNA is $130/kg in 2021. By coincidence, when a translation is made to dollars per pound using 2024$, this corresponds quite closely to the current price line on Figure 6. Indeed, prices do sometimes bounce high. The problem is getting them to stay as high as the dotted line for long enough to support the multi-decade life of a mine. Economists were forecasting a price of $300 per barrel oil a few years ago, but they have been disappointed. The price is under $75 per barrel now.

The country with the most potentially recoverable uranium is Australia. It produced only 9% of the world’s uranium in 2022, but is reported to have 28% of the world’s remaining reserve. Consistently higher prices would be needed for Australia to start opening new mines.

It is also possible that more uranium supply might become available if improved extraction techniques are developed.

The world seems to be past peak crude oil. By itself, the peak oil issue could limit new uranium extraction and transport.

[6] Recycling of spent fuel to recover usable uranium and plutonium has been accomplished only to a limited extent. Experience to date suggests that recycling has many issues.

It is possible to make an estimate of the amount of recycling of spent fuel that is currently being performed. Figure 3 in Section [1] shows about 65,000 metric tons of uranium are required to meet the demands of existing nuclear power generation, and that as of 2022, there was about an annual shortfall in supply of about 26%. Based on what information I have been able to gather, existing recycling of uranium and plutonium amounts to perhaps 6% of the overall fuel requirement. Thus, as of 2022, today’s recycling of spent fuel could perhaps shave this shortfall in uranium supply to “only” 20% of annual nuclear fuel requirements. There is some recycling of spent fuel, but it is small in relation to the amount needed.

There seem to be several issues with building units to recover uranium from spent fuel:

  1. Higher cost than simply mining more uranium
  2. Pollution problems from the recycling plants
  3. Potential for use of the output to make nuclear warheads
  4. Potential for nuclear accidents within the plants
  5. Remaining radioactivity at the site at the end of the reprocessing plant’s life, and thus the need to decommission such plants
  6. Potential for many protestors disrupting construction and operation because of issues (2), (3), (4), and (5)

The US outlawed recycling of spent fuel in 1977, after a few not-very-successful attempts. Once the purchase of Russian warheads was arranged, down-blending of warheads was a much less expensive approach than reprocessing spent fuel. Physics Today recently reported the following regarding US reprocessing:

“A plant in West Valley, New York, reprocessed spent fuel for six years before closing in 1972. Looking to expand the plant, the owners balked at the costs required for upgrades needed to meet new regulatory standards. Construction of a reprocessing plant in Barnwell, South Carolina, was halted in 1977 following the Carter administration’s ban.”

Japan has been trying to build a commercial spent fuel reprocessing plant at Rokkasho since 1993, but it has had huge problems with cost overruns and protests by many groups. The latest estimate of when the plant will actually be completed is fiscal year 2026 or 2027. The plant would process 800 metric tons of fuel per year.

The largest commercial spent fuel reprocessing plant in operation is in La Hague, France. It has been in place long enough (since 1966) that it has run into the issue of decommissioning an old unit, which was started as a French military project. The first processing unit was shut down in 2003. The International Atomic Energy Administration says, “The UP2-400 decommissioning project began some 20 years ago and may be expected to continue for several more years.” It talks about the huge cost and number of people involved. It says, “Decommissioning activities represent roughly 20 per cent of the overall activity and socio-economic impact of the La Hague site, which also hosts two operating spent fuel recycling plants.”

The cost of the La Hague reprocessing units is probably not fully known. They were built by government agencies. They have gone through various owners including AREVA. AREVA has had huge financial problems. The successor company is Orano. The currently operating units have the capacity to process about 1,700 metric tons of fuel per year. The 1700 metric tons of reprocessing of spent fuel from La Hague is reported to be nearly half of the world’s operating capacity for recycling spent fuel.

I understand that Russia is working on approaches that quite possibly are not included in my figures. If so, this may add to world uranium supply, but Russia is not likely to want to share the benefits with the West if there is not enough to go around.

[7] The concentration of the isotope uranium-235 is very important in making fuel for the proposed new modular nuclear reactors.

Uranium-235 makes up 0.72% of natural uranium. Wikipedia says, “Unlike the predominant isotope uranium-238, it [uranium-235] is fissile, i. e., it can sustain a nuclear reaction.” In most reactors used today, the concentration of uranium-235 is 3% to 5%.

According to CNN, the plan in building advanced modular small reactors is to use fuel with a 5% to 20% concentration of uranium-235. Fuel at this concentration is called high assay low-enriched uranium, or HALEU. The expectation is that power plants with this type of fuel will be more efficient to operate.

Producing higher concentrations of uranium-235 tends to be problematic unless nuclear weapons are available for down-blending; warheads use high concentrations of uranium-235. Now, with reduced availability of nuclear warheads for down-blending, other sources are needed in addition. CNN reports that the only commercial source of HALEU is Russia. The EIA reports that the Inflation Reduction Act invested $700 million to support the development of a domestic supply chain for HALEU.

[8] The US is trying to implement many new ideas at one time with virtually no successful working models to smooth the transition.

Strangely enough, the US has no working model of a small-scale nuclear reactor, even one operating on conventional fuel. A CNBC article from September 2024 says, Small nuclear reactors could power the world, the challenge is building the first one in the US.

The new small-scale nuclear projects we do have are still at a very preliminary stage. In June 2024, Bill Gates wrote, “We just broke ground on America’s first next-gen nuclear facility. Kemmerer, Wyoming will soon be home to the most advanced nuclear facility in the world.” The plan is for it is to become operational by 2030, if it has access to HALEU fuel.

With respect to how far along the ability to make HALEU from spent fuel is, an October 2024 article in Interesting Engineering says, “US approves new facility design concept to turn nuclear waste into reactor fuel:”

“The facility whose conceptual design has been approved will be located at Idaho National Laboratory (INL). It will help turn used material recovered from DOE’s former Experimental Breeder Reactor-II (EBR-II reactor) into usable fuel for its advanced nuclear power plant. . . The plan is to recover approximately 10 metric tons of HALEU from EBR-II fuel by December 2028 using an electrochemical process that was perfected over the years at Idaho National Laboratory (INL).”

Assuming this can be done, it will be a step forward, but it is nowhere near being an at-scale, commercial project that can be done economically by other companies. The volume of 10 metric tons is tiny.

Starting at this level, it is difficult to see how reactors with the new technology and the HALEU fuel to feed them can possibly be available in quantity before 2050.

[9] It is difficult to see how the cost of electricity generated using the new advanced modular nuclear reactors and the new HALEU fuel, created by reprocessing spent fuel, could be low.

As far as I can see, the main argument that these new modular electricity generation plants will be affordable is that they will only generate a relatively small amount of electricity at once —about 300 megawatts or less, or about one third of the average of conventional nuclear reactors in the US. Because of the smaller electricity output, the hope is that they will be affordable by more buyers, such as utility companies.

The issue that is often overlooked by economists is that electricity generated using these new techniques needs to be low cost, per kilowatt-hour, to be helpful. High-cost electricity is not affordable. Keeping costs down when many new approaches are being tried for the first time is likely to be a huge hurdle. I look through the long list of problems encountered in recycling spent fuel mentioned in Section [6] and wonder whether these issues can be inexpensively worked around. There are also issues with adopting and installing the proposed new advanced modular reactors, such as security, that I have not even tried to address.

The hope is that somehow, the whole process of building the advanced modular nuclear reactors and creating the HALEU fuel can be standardized and can be organized in such a way that economies of scale will set in. It seems to me that reaching this goal will be difficult. In theory, perhaps such a goal can be reached in 2060 or 2070, but this is not nearly soon enough, given the world’s current shortage of uranium from mines.

[10] The Trump administration will likely drop or substantially change the current program for advanced modular nuclear reactors.

The US plan that is discussed in this post has been developed under the Biden administration. This group was voted out of power on November 5. The Democratic administration will be replaced by a new Republican administration, headed by Donald Trump, on January 20, 2025.

I would not be surprised if the advanced modular nuclear generation plan disappears, almost as quickly as the currently subsidized offshore wind program, which Trump has vowed to end. The two programs have many things in common: Both programs provide an excuse for more US debt; they provide many jobs for researchers; and the devices that they relate to can be purchased in fairly small increments. But the cost per kilowatt-hour of electricity is likely to be high with either program. In some sense, as they are currently envisioned, they will not efficient ways to produce electricity. A major problem is the lack of fuel for the new modular reactors, and the slow ramp-up time to obtain this fuel.

I expect that under Trump, the sanction against purchasing HALEU from Russia might be replaced with a tariff. That way the US could have the benefit of HALEU, purchased from Russia, but at a higher price. This would allow research to continue, if desired.

[11] If solutions cannot be found, electricity generation from nuclear is likely to gradually disappear.

Over time, the world’s self-organizing economy tends to eliminate its more inefficient parts. When I look at the past experience with nuclear, what I see seems to be another example of the self-organizing economy squeezing out the inefficient parts of the economy (Figure 7):

Figure 7. Nuclear electricity generation by part of the world, based on data of the 2024 Statistical Review of World Energy, published by the Energy Institute.

In this chart, “Advanced Economies, ex US” are defined as members of the Organization for Economic Development (OECD), excluding the US. “Later Entrants” are non-OECD members, excluding Russia and Ukraine. They include China, India, Indonesia, and many other lower-income countries. Many of these countries are in East Asia.

What I see is that the relatively “flat” overall nuclear electricity production has been accomplished, to a significant extent, by the “Advanced Economies, ex US” dropping back in their use of nuclear electricity at close to the same time the “Later Entrants” have rapidly been increasing their use of nuclear electricity. The Later Entrants can make goods for sale in international markets much more cheaply than the Advanced Economies, ex US through their efficient use of cheap energy (often from coal) and their lower wages. This more efficient approach gives the Later Entrants an “edge” in buying the uranium that is available.

I expect to see more of this pattern of squeezing out in the future. In fact, new and recently re-opened nuclear plants will need to compete existing nuclear generation units for available uranium.

Given the way squeezing out takes place, very few people will realize that there is a problem with uranium fuel. It will just be that leaders of some parts of the world, as well as some parts of the US, will start emphasizing stories about how dangerous nuclear energy is. Instead of nuclear, they will emphasize electricity generation from wind and solar and allow these approaches to “go first” when they are available. The result will be wholesale electricity prices that will be far too low for nuclear power plants, much of the time. It will be these low wholesale electricity prices that push nuclear power out.

Thus, unless there truly are breakthroughs in recycling spent fuels, or in uranium mining, electricity generation using nuclear energy may gradually slip away from many parts of the world currently using it.

Posted in Alternatives to Oil | Tagged | 1,824 Comments

Oil shortages lead to hidden conflicts–even war

Posted on October 14, 2024 by Gail Tverberg

Summary: We live in a conflict-filled world today. I believe that this is ultimately a “not-enough-to-go-around” problem. Hidden oil shortages are the problem. Strangely, at this stage in the economic cycle, oil shortages seem to appear as high interest rates rather than high prices. The “climate is our biggest problem” narrative gets told repeatedly because it makes cutting back on fossil fuels sound like a virtuous thing, rather than something we are being forced to do.

Introduction: When a major change occurs, such as moving to a new home, there are always a variety of explanations as to why the change took place. When explaining the change to someone else, we will almost always give a positive reason for the move, such as moving to be closer to relatives, access to better job opportunities, or to enjoy a better climate. We don’t talk more than necessary about negative issues such as being fired from a job, undergoing bankruptcy, or considering a divorce from one’s spouse.

With oil shortages and other energy problems (including the possibility of too much fossil fuels leading to climate change), the situation is in some ways similar. There is no simple answer as to why these problems are occurring. What we end up with is different groups seeing the current situation and its long-term resolution from different perspectives. Each group emphasizes the aspects of the problem that they see as most amenable to being solved. The different perspectives lead to conflicts among the groups.

We are living in a finite world. It is not clear that any perfect solutions are at hand. What is clear is that a finite world behaves very differently from what our intuition or the models created by economists suggests. In this post, I will try provide a partial explanation of what our energy dilemma entails, and how this leads to conflict, even war.

[1] World crude oil supply suddenly “turned a corner” about 1973. There was a huge change both in the price and growth rate of the oil supply.

Figure 1. Average annual Brent equivalent oil price, in 2023 US dollars, based on data of the 2024 Statistical Review of World Energy by the Energy Institute.

Prices were amazingly low prior to about 1973. The prices shown have been adjusted for inflation to the 2023 price level.

Once oil prices rose, the growth rate of oil consumption collapsed because goods and services made with oil were no longer as affordable. There was also an effort to cut back on oil consumption because it was clear that low-cost oil supply was limited.

Figure 2. Average annual increase in crude oil supply over 10-year periods, based on data from three sources: Appendix A of Vaclav Smil’s book, Energy Transitions: History, Requirements, Prospects, EIA data, and data from the 2024 Statistical Review of World Energy, published by the Energy Institute.

Increases in the supply of very cheap oil allowed many improvements to infrastructure. Electricity transmission lines, interstate highways, long distance oil and gas pipelines, and infrastructure supporting transport by air were all added. The economy became more productive. Figure 3 shows that the wages of even low-paid workers were able to rise.

Figure 3. Chart by Emmanuel Saez based on inflation-adjusted Social Security earnings.

Up until 1968, US wages for both the bottom 90% of workers and the top 10% of workers rose much faster than inflation. With this change, all kinds of goods and services became more affordable, including food, new homes, and new cars. In the period 1968 to 1981, the wages of both groups rose as fast as inflation. After 1981, growth of the wages of the top 10% far exceeded the inflation rate. Figure 3 shows data for the US, but the “Marshall Plan” helped spread economic growth to Europe, as well.

The rising oil prices in 1973 and 1974 brought the growth of oil consumption down to a much lower level. Without low-priced oil, inflation and recession became much more of a problem.

[2] Interest rate changes are being used to offset problems caused by too much or too little oil supply growth.

Figure 4. Chart produced by the Federal Reserve of St. Louis, showing 3-month and 10-year US Treasury yields through October 7, 2024.

Figure 4 shows that rising interest rates acted as brakes on the economy up until 1981. Figure 3 shows that this was a period when the purchasing-power of workers was rapidly expanding, indirectly because of the rising supply of cheap oil. The reason why these higher rates slowed the economy is because higher interest rates make it more expensive to finance high-cost purchases. These higher interest rates also tended to hold down price appreciation of assets such as homes and shares of stock because fewer buyers could afford them.

Lowering interest rates over the four decades beginning in 1981 acted in the opposite direction. These lower interest rates made major purchases more affordable, allowing more people to afford a given home or farm. This tended to raise home and farm prices. In the US, refinancing mortgages at lower interest rates and taking out some or all of the price appreciation on the property became popular, further adding to purchasing power. These changes acted to boost the economy, hiding the growing problems with high-cost oil supply.

[3] The world now seems to be hitting two limits at once: (a) Crude oil supply is not keeping up, and (b) Interest rates are stubbornly high.

Figure 5. World crude oil production through June 2023 based on data of the EIA, divided by UN 2024 world population estimates.

Figure 5 shows that world crude oil production (relative to population) was lower in June 2024 than for any month since June 2022. The June 2024 production level was much lower than in 2019, before the drop-off in oil production related to Covid-19 restrictions. A longer view strongly suggests that the peak in world oil production took place in 2019.

Based on the high prices experienced in the 1970s, many people today assume that inadequate oil supply will be signaled by high prices. Instead, what is happening now is more of an affordability problem. There are more young people with student loans who cannot afford cars or families. There are many people with college degrees working at jobs that do not require advanced education, and thus do not pay well. There are more immigrants earning low wages. Because of these factors, overall demand tends to stay too low to encourage the development of new, more marginally profitable, oil wells.

Interest rates shown in Figure 4 have risen sharply since 2020. Governments in many countries have raised debt levels, but this added debt has not resulted in a corresponding amount of goods and services being added. The problem is that the oil supply needed to produce these goods and services isn’t rising sufficiently. Instead, the added debt has tended to produce inflation.

Currently, politicians around the world want to add new programs (financed by debt) to help their economies out. If this new debt actually gets more oil out of the ground (through higher oil prices), it may be helpful. But, so far, the additional spending isn’t producing a corresponding amount of goods and services; instead, inflation is tending to stay rather high. This is a sign that limits on inexpensive-to-extract crude oil are being reached. With more inflation, interest rates on mortgages will remain stubbornly high, and economies will deteriorate.

Governments may want to reduce long-term interest rates, but they cannot do so without having the market for these loans disappear. In this part of the economic cycle, it appears that high interest rates, indirectly due to inadequate inexpensive-to-extract crude oil supplies, act as a brake on the economy instead of high oil prices. This confuses those who are expecting high oil prices to signal inadequate supply!

[4] Citizens are not being told about the shortage of low-cost crude oil. Instead, a climate change narrative is being emphasized.

In the 1970s, huge spikes in oil prices led to an immediate understanding that the world had an oil problem. But the fact that the economy has gone on since then, and oil prices are no longer up in the stratosphere, has led people to believe that the shortage problem has gone away. Adding to this belief is the fact that there seem to be substantial oil resources that can be extracted with current technology if the price is high enough.

With a different model, based on the amount of fossil fuels that might be available (if prices could rise high enough, for long enough), it is possible to conclude that if the world continues to extract fossil fuels as it has in the past, this will contribute to rising CO2 levels. This, in turn, could have an impact on the climate.

In my opinion, we are currently facing a serious shortage problem today, not only with crude oil, but also with coal. World coal consumption, relative to population, has turned down in the period since 2012.

Figure 6. World coal consumption per person, based on data of the 2024 Statistical Review of World Energy, published by the Energy Institute.

The problem with coal seems to be similar to oil; there seems to be plenty of coal in the ground, but prices won’t rise high enough, for long enough, to allow extraction of the higher-cost coal.

Anyone looking at the situation, regardless of their perspective, would say, “We truly need something other than oil and coal to supplement our current energy supply.” The question becomes, “How can this issue be framed to be moderately acceptable to the public?” President Jimmy Carter, back in 1977, talked about the energy crisis and the need to use less oil, but he was not re-elected. Citizens didn’t like the idea of changing their lifestyles.

Somehow, the plan was developed to frame the problem as a climate change problem. This approach had multiple advantages:

(a) This approach would perhaps lead to finding some alternatives to oil and coal.

(b) Citizens would be able to feel virtuous, as they voluntarily endured higher prices and lower energy supplies, during the hoped-for transition.

(c) This approach would allow huge investment opportunities for businesses, including oil and gas companies. Higher profits would perhaps follow. Universities would also benefit.

(d) The economy would show higher GDP because of the growing debt used to finance the so-called renewables. Job opportunities would develop.

(e) Framing the conversation in terms of a climate change narrative instead of the crude oil shortage narrative conveniently leaves out the importance of very low energy prices for the affordability of finished goods. This narrative also leaves out the importance of an adequate total quantity of energy products to maintain GDP growth. Economists didn’t understand either of these issues.

(f) When the carbon emissions goals were announced in the Kyoto Protocol in 1997, the goals had the indirect effect of shifting industry from the US and Europe to China and other Asian countries. Because of the use of very inexpensive coal and low-cost labor, the shift would allow for the world production of manufactured goods to grow at very low cost. Businesses in the US and Europe could hopefully take advantage of this shift because US and European oil and coal supplies were becoming depleted, making it impossible to make this change without the assistance of coal supplies from China and elsewhere.

[5] The world economy is already facing a not-enough-to-go-around problem that plays out in many ways. These not-enough-to-go-around issues contribute to conflict.

(a) Exporters are not getting high enough prices for their exported oil. Revenue from oil is used both to support the development of new fields and to provide tax revenue for governments to provide services for their citizens. If oil prices were $100 to $150 per barrel, exporters would have the additional revenue needed to support their economies. This is a major reason why Russia and Middle Eastern countries are in turmoil.

We don’t think of low oil prices as a not-enough-to-go-around issue, but it is. Shortages of fossil fuels of any kind tend to slow the growth in the supply of finished goods and services that use those products. The part of the world economy left behind can be the producers of fossil fuels, even more than the consumers.

(b) Natural gas export prices have tended to be too low. Low pipeline natural gas prices to Europe were a major reason why Russia wanted to shift its natural gas exports toward China and other Asian countries, where prices might be higher. US natural gas producers are also unhappy about the low prices they get. The US would be happy to push Russia out as a natural gas exporter to Europe.

(c) The Advanced Economies have reduced industrialization because of depleting oil and coal supplies. They have substituted the sale of services.

The US first shifted away from industrialization in 1974, immediately after it discovered that its non-shale oil supply was declining, and the price of additional oil would need to be much higher. A further shift occurred after the 1997 Kyoto Protocol.

Figure 7. US industrial energy consumption per capita, divided among fossil fuels, biomass, and electricity, based on data from the US Energy Information Administration (EIA). (All energy types, including electricity, are measured by their capacity to generate heat. This is the approach used by the EIA, the IEA, and most researchers.)

At the same time, the industrial production of the “Other than Advanced Economies” (including China, Russia, and Iran) has soared. The industrial production of these economies now exceeds that of the Advanced Economies (including the US, most of Europe, Japan, Australia among others–defined as OECD members).

Figure 8. Industrial production in 2015 US$, for Advanced Economies (members of the Organization for Economic Development) and Other than Advanced Economies, based on World Bank Industrial Production (including construction) data.

What oil is available is increasingly consumed by the “Other than Advanced Economies.”

Figure 9. Percentage shares of the world consumption of gasoline, diesel, and jet fuel, based on data of the 2024 Statistical Review of World Energy, published by the Energy Institute.

(d) Consumption of the main products of crude oil is being squeezed down by strange temporary economic downturns, especially in the Advanced Economies.

Advanced Economies seem to be adversely affected far more than less advanced economies, partly because industrialization is essential; services can more easily be eliminated.

Figure 10. Total world consumption of gasoline, diesel, and jet fuel divided between Advanced Economies and Other than Advanced Economies based on data of the 2024 Statistical Review of World Energy, published by the Energy Institute.

(e) Poor people of the world are especially affected by the not-enough-to-go-around phenomenon, while wealthy individuals and corporations amass more wealth and power.

This is a physics issue that plays out in many ways. Young people, in particular, find it difficult to make adequate wages to afford a home and family. Even young people who obtain higher education find it difficult to succeed.

Major foundations, such as the Bill and Melinda Gates Foundation, gain power over what would appear to be independent organizations, such as the World Health Organization, by making huge donations. Regulators of many kinds become tied to the groups they regulate, making decisions that favor the companies that they are supposed to be regulating over the welfare of the individual citizens that they are supposed to be protecting.

In the current situation, the general public feels increasingly powerless, and many feel the urge to take matters into their own hands. All these things add to the conflict situation.

[6] The United States has been the leading world power, but its ability to defend other countries militarily is rapidly eroding.

While Ukraine, Israel, Taiwan, and members of the EU would like to think that the US can adequately defend their interests militarily, this ability is rapidly eroding. Today, nearly every type of manufacturing in the US requires supply lines from around the world. It is difficult to supply needed military aid to countries overseas, without placing an order for supplies from a country that the US is increasingly in conflict with.

Even the supply of electrical transformers to replace damaged ones in war zones raises a question of whether a sufficient supply can be assured to meet the demand for replacements for storm-damaged transformers in the US. Long lead times are often required to obtain transformers in the US, even in the absence of any additional demand for them.

The US tends to use sanctions to try to get other countries to do as it prefers. This approach doesn’t work well because sanctioned countries learn to work around the sanctions. Increasingly, in the BRICS countries, steps are being taken to move away from the US dollar as the standard for trade.

As long as the US is the accepted world leader, other countries that are involved in conflicts (which are indirectly about energy supply) will try to draw the US in to support them. Ukraine has been having energy problems for a very long time.

Figure 11. Energy consumption per person in Ukraine, based on data of the 2024 Statistical Review of World Energy, published by the Energy Institute.

The EU, the UK, and Israel all seem to want war, and they would like the US to help them.

Figure 12. Oil consumption per capita for the EU, the UK, and Israel, based on data of the 2024 Statistical Review of World Energy, published by the Energy Institute.

In 2023, US per-capita oil consumption is more than double that of the EU, UK, and Israel at the same date. The US’s total energy consumption per-capita is more than four times that of Ukraine. These countries assume that the US can provide the weapons and other assistance they need. But the countries they are fighting against know that the US is dependent upon supply lines that extend around the world. Actually, the US’s ability to provide help is quite limited. This adds other areas of conflict.

[7] The shift to wind and solar electricity is not working out as planned.

While the US has added wind and solar capacity, it has not added to the per-capita electricity supply. It is too expensive when all the costs are considered, and it is often not available when needed.

Figure 13. Historical US electricity generation per person, with and without wind and solar electricity, based on data of the US EIA.

Communities are figuring out that if they really want a larger electricity supply (to support electric vehicle use or growing artificial intelligence demands), they need to add something other than wind and solar. In the US, this usually means added natural gas electricity generation. There are also at least two plans to reactivate closed nuclear plants in the US.

The EU has not had any better success at ramping up per-capita electricity generation using wind and solar (Figure 14).

Figure 14. EU electricity generation per person, based on data of the 2024 Statistical Review of World Energy, published by the Energy Institute.

A glance at Figure 7 (above) suggests that industrialization doesn’t really come from an expanded electricity supply. Inexpensive fossil fuels seem to be the base of industrialization, and the world is increasingly short of these.

While approaches for moving away from fossil fuels, other than wind and solar, are being tried, success at an adequate scale seems to be far away.

[8] It is hard to tell the rest of the story in detail.

We live in a finite world. All parts of the economy operate in cycles. In fact, individual people, individual businesses, and individual governments all have finite lifespans. We now seem to be coming to the end of an economic cycle. We don’t know precisely how this will end. We do know, based on history, that the downward part of the cycle will likely take years to resolve.

We as individuals are hard-wired to prefer “happily ever after” endings to our narratives. This is why people who believe that we are running short of fossil fuels tend to believe that if we just try a little harder, we can extract more oil, natural gas, and coal. There must be enough resources in the ground if we focus our efforts in that direction.

On the other hand, people who believe that climate change is our biggest problem seem to think that we can transition to using a modest amount of renewable energy instead. Unfortunately, the physics of the situation doesn’t allow things to play out that way. Also, our so-called renewables are built on a base of oil and coal. If we can’t get enough oil and coal out, already built renewables will stop functioning within a few years, and new ones will be impossible to build.

Nearly everyone who does modeling assumes that the future will be very similar to the past. Analysts assume that the economy can continue to grow forever. They assume that it is possible to pull larger and larger amounts of resources from the ground. It is easy to assume that leaders will look out for the best interests of all their constituents, and that businesses will act ethically. But we have already begun to see evidence that these assumptions don’t necessarily hold. The fact that some people can see that changes are coming, while others cannot, is part of the reason for the current conflict.

A major problem that the world faces is the fact that while governments can print more money, they can’t print more resources. Thus, broken supply lines are likely to become more common. Wars may need to be fought in new ways–for example, taking down other another country’s internet or electrical grid. Pensions will likely need to be cut back greatly, or they may ultimately disappear completely.

We don’t know how this all will end, but a great deal of conflict of one kind or another seems very likely in the next few years.

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Crude oil extraction may be well past peak

Posted on September 11, 2024 by Gail Tverberg

World crude oil extraction reached an all-time high of 84.6 million barrels per day in late 2018, and production hasn’t been able to regain that level since then.

Figure 1. World monthly crude oil production based on data of the US Energy Information Administration (EIA). The straight orange line represents the 24-month average during the period June 2022 through May 2024.

Oil prices have bounced up and down over the ten-year period 2014 to 2024 (Figure2).

Figure 2. Average monthly Brent spot crude price, based on data of the US EIA.

In this post, I show that changing oil prices have had varying impacts on production. Recently, lower prices seem to be associated with lower production because extraction has become less profitable for producers. A temporary spike in oil prices does little to raise production. The view of economists that crude oil extraction can continue to rise indefinitely because lower production leads to higher prices, which in turn leads to greater production, is not true. (Economists also believe that substitutes can be helpful, but this is not a subject I will try to cover in this post.)

[1] World crude oil production has not regained its level prior to the Covid restrictions.

According to EIA data in Figure 1, the highest single month of crude oil production was November 2018, at 84.6 million barrels per day (mb/d). The highest single year of crude oil production was 2018, when world crude oil production averaged 82.9 mb/d. The last 24 months of oil production have averaged only 81.7 mb/d of production. Compared to the year with the highest average production, world oil production is down by 1.2 mb/d.

Furthermore, in Figure 1, there is nothing about the world production path in the last 24 months that gives the impression that oil production will be surging upward anytime soon. It merely increases and decreases slightly.

World population continues to grow. If economists are to be believed, oil prices should be shooting upward in response to rising demand. However, oil prices have not generally been increasing. In fact, as of this writing, the Brent crude oil price stands at $69, which is lower than the recent average monthly price shown in Figure 2. There is concern that the US economy is going into recession, and that this recession will cause oil prices to fall further.

[2] OPEC oil production seems as likely as other source of production to be influenced by price, since OPEC sells oil for export and can theoretically cut back easily.

Figure 3. Monthly crude oil production for OPEC based on data of the US EIA.

One thing that is somewhat confusing about OPEC’s oil production is the fact that the membership of OPEC keeps changing. The data the EIA displays is the historical production for the current list of OPEC members. If former members left OPEC because of declining production, this would be hidden from view.

Based on the EIA’s method of displaying historical OPEC oil production, the peak in OPEC production occurred in November 2016, at 32.9 mb/d. The highest year of oil production was 2016 at 32.0 mb/d, with 2017 and 2018 almost as high. Average production during the last 24 months has been 29.2 mb/d, or 2.8 mb/d lower than the 32.0 mb/d production in its highest year. Thus, recent OPEC production has fallen further than world production, relative to their respective highest years. (World production is down only 1.2 mb/d relative to its highest year.)

[3] An analysis of OPEC’s production relative to price indicates that patterns change over time.

Prices have changed dramatically between 2014 and 2024. I chose to look at prices versus production during three different time periods, since these periods seem to have very different production growth patterns:

  • January 2016 to November 2016 (rising OPEC production)
  • December 2016 to April 2020 (falling OPEC production)
  • May 2020 to May 2024 (rising and then falling OPEC production)

These are the three charts I created:

Figure 4. Brent oil price versus oil production for the months of January 2014 through November 2016 based on EIA data.

During this initial period ending November 2016, the lower the price of oil, the more OPEC’s Oil production increased. This approach would make sense if OPEC was trying to keep its total revenue high enough to “keep the lights on.” If some other country (such as the United States in Figure 7) was flooding the world with oil, and through its oversupply depressing prices, OPEC didn’t choose to respond by cutting its own production. Instead, it seems to have pumped even more. In this way, OPEC could make certain that US producers weren’t really making money from their newly expanded supply of crude oil. Perhaps the US would quickly cut back–something it, in fact, did between April 2015 and Nov. 2016, shown in Figure 7 below.

Figure 5. Brent oil price versus oil production for the months of December 2016 through April 2020 based on EIA data.

During this second period ending April 2020, prices plunged to a very low level, but production didn’t change significantly. It is difficult to change production levels in response to a specific shock because the whole system has been set up to provide a certain level of oil extraction, and it takes time to make changes. Other than that, prices didn’t seem to have much of an impact on production.

Figure 6. Brent oil price versus oil production for the months of May 2020 through May 2024 based on EIA data.

In this third period ending May 2024, OPEC producers seem to have been saying, “If the price isn’t high enough, we will reduce production.” Figure 6 shows that with higher prices, the amount of oil extracted tends to rise, but only up to a limit. When prices temporarily hit high levels (in March to August of 2022–the dots over to the right in Figure 6), production couldn’t really rise. The necessary infrastructure wasn’t in place for a big ramp up in production.

Perhaps if prices had stayed very high, for very long, maybe production might have increased, but this is simply speculation. Oil companies won’t build a lot of extraction infrastructure that they don’t need, regardless of what they may announce publicly. I have been told by someone who worked for Saudi Aramco (in Saudi Arabia) that the company has (or at one time had) a lot of extra space for oil storage, so that the company could temporarily ramp up deliveries, as if they had extra productive capacity readily available, but that the company didn’t really have the significant excess capacity that it claimed.

[4] US oil production since January 2014 has followed an up and down pattern, to a significant extent in response to price.

Figure 7. Monthly crude oil production for the US based on international data of the US EIA.

Figure 7 shows three distinct humps, with the first peak in April 2015, the second peak in November 2019, and the third peak in December 2023.

In the first “hump,” there was an oversupply of oil when the US was trying to ramp up its domestic oil supply of oil (through tight oil from shale) at the same time that OPEC also increasing production. The thing that strikes me is that it was OPEC’s oil supply in Iraq that was ramping up and increasing OPEC’s oil supply.

Figure 8. Split between Iraq crude oil production and the rest of OPEC’s crude oil production, using the 2024 definition of the countries in OPEC, based on data of the US EIA.

The rest of OPEC had no intention of cutting back if the US was arrogant enough to assume that it could raise production of both US shale and of Iraq with no adverse consequences.

Looking at the detail underlying the first US hump, oil production rose between January 2014 and April 2015 when production was “stopped” by low prices, averaging $54 per barrel in January through March 2015. The US reduced production, particularly of shale, since that was easy to cut back, hitting a low point in September 2016. The combination of growing oil supplies from both the US and OPEC led to average oil prices of only $46 per barrel during the three months preceding September 2016.

Eventually OPEC oil production peaked in November 2016 (Figure 3), leaving more “space” available for US oil production. Also, oil prices were able to rise, reaching a peak of $81 per barrel in October 2018. World crude oil production hit a peak in November 2018 (Figure 1). But even these higher prices were too low for OPEC producers. They announced they were cutting back production, effective January 2019, to try to further raise prices.

During the second hump, US oil production rose to 12.9 mb/d in November 2019. The oil price for the three months preceding November 2019 was only $61 per barrel. Evidently, this was not sufficient to maintain oil production at the same level. The number of “drilled but uncompleted wells” began to rise rapidly.

Figure 9. US drilled but uncompleted shale wells based on data of the US EIA.

Drillers chose not to complete the wells because the initial indications were that the wells would not be sufficiently productive. They were set aside, presumably until prices rise to a high enough level to justify the investment.

Figure 7 shows that the US oil production had already started to fall before the Covid-related drop in oil production, which began around April and May of 2020.

[5] The rise in US oil production since May 2020 has been a bumpy one. The peak in US oil production in December 2023 may be its final peak. 

The rise in oil production since May 2020 has included the completion of many previously drilled but uncompleted (DUC) wells. There has been a trend toward fewer wells, but “longer laterals,” so the earlier wells drilled were probably not of the type most desired more recently. But these previously drilled wells had some advantages. In particular, the cost of drilling them had already been “expensed,” so that, if this earlier cost were ignored, these wells would provide a better return to shareholders. If production was becoming more difficult, and shareholders wanted a better return on their (most recent) investment, perhaps using these earlier drilled wells would work.

There remain several issues, however. Currently, the number of DUCs is down to its 2014 level. The benefit of already expensed DUCs seems to have disappeared, since the number of DUSs is no longer falling. Also, even with the addition of oil from the DUCs, the annual rise in US oil production has been smaller in this current hump (0.8 mb/d) than in the previous hump (1.4 mb/d).

Furthermore, there are numerous articles claiming that the best shale areas are depleting, or are providing production profiles which focus more on natural gas and natural gas liquids. Such production profiles tend to be much less profitable for producers.

I think it is quite possible that US crude oil production will start a gradual downward decline in the coming year. It is even possible that the December 2023 monthly peak will never be surpassed.

[6] Oil prices are to a significant extent determined by debt levels and interest rates, rather than what we think of as simple “supply and demand.”

Debt bubbles seem to hold up commodity prices of all kinds, including oil. I have discussed this issue before.

Figure 10. Figure showing the dramatic drop in oil prices when US debt levels collapsed in 2008. The existence of quantitative easing, which affected interest rates, also seemed to affect oil prices.

It seems to me that all the manipulations of debt levels and interest rates by central banks are ultimately aimed at maneuvering oil prices into a range that is acceptable to both producers of crude oil and purchasers of crude oil, including the various end products made possible through the use of crude oil.

Food production is a heavy user of crude oil. If the price of oil is too high, one possible outcome is that food prices rise. If this happens, consumers become unhappy because their budgets are squeezed. Alternatively, if food prices don’t rise sufficiently, farmers find their finances squeezed because they cannot get a high enough return on all of the required farming inputs.

[7] The current debt bubble is becoming overstretched.

Today’s debt bubble is driving up stock prices as well as commodity prices. We can see various pressures around the world associated with this debt bubble. For example, in China many homes have been built in recent years primarily for investment purposes, rather than residential use. This property investment bubble is now collapsing, bringing down property prices and causing banks to fail.

As another example, Japan is known for its “carry trade,” which is made possible by the combination of its low interest rates and higher rates in other countries. The Japanese government has a very high debt level; it cannot withstand more than a very low interest rate. There is significant concern that this carry trade will unwind, an issue that has already been worrying world markets.

A third example relates to the US, and its role of holder of the US dollar as reserve currency, which means that the US dollar is used heavily in international trade. Historically, the holder of the reserve currency has changed about every 100 years, in part because the high demand for the reserve currency allows the government holding the reserve currency to borrow at lower interest rates than other countries. With these lower interest rates, and the need to pull the world economy along, there is a tendency to “spur asset bubbles.” But an asset bubble is likely to have a debt bubble propping it up.

My previous post raised the issue of the economy today being exposed to a debt bubble. There has been excessive borrowing in many sectors of the economy that have been doing poorly. Commercial real estate is an example, as witnessed by many nearly empty office buildings and shopping malls. People with student loan debt often delay starting a family because they are struggling with repayment of those loans.

If any or all these bubbles should burst, there could be a swift downward fall in oil prices and commodity prices, in general. This could be a major problem because producers would tend to leave the market, and world GDP, which depends on energy supplies of the right kinds, would fall.

[8] Oil is an international commodity. Disruption of demand by any major user could pull prices down for everyone.

China is the single largest importer of oil in today’s world. Its economy seems to be struggling now. This, by itself, could pull world oil prices down.

[9] We don’t often think about the fact that oil prices need to be both high enough for producers and low enough for consumers.

Economists would like to think that oil prices can rise endlessly, allowing more oil to be extracted, but history shows that this is not what happens. If there are too many people for the available resources, wage and wealth disparity tends to increase, leading to many more very poor people. Lots of adverse things seem to happen: the holder of the reserve currency tends to change, wars tend to start, and governments tend to collapse or be overthrown.

[10] Simply because crude oil is in the ground and the technology seems to be available to extract the crude oil doesn’t mean that we can necessarily ramp up crude oil production.

One of the major issues is getting the price up high enough, and long enough, for producers to believe that there is a reasonable chance of making money through a major new investment. The only time that oil prices were above $100 for a sustained period was in the 2011 to 2013 period. On an inflation-adjusted basis, prices also exceeded $100 per barrel in the 1979 to 1982 period based on Energy Institute data. But we have never had a period in which oil prices exceeded $200 or $300 per barrel, even after accounting for inflation.

The experience of 2014 and 2015 shows that even if oil prices rise to high levels, they do not necessarily remain high for very long. If several parts of the world respond with higher oil production simultaneously, prices could crash, as they did in 2014.

There is also a need for the overall economic system to be available to support both the extraction of and the continuing demand for the oil. For example, much of the steel pipe used by the US for drilling oil comes from China. Computers used by engineers very often come from China. If China and the US are at odds, there is likely to be a problem with broken supply lines. And, as I said in Section 8, disruption of demand affecting even one major importer, such as China, could bring demand (and prices) down significantly.

[11] Conclusion.

The crude oil situation is far more complex than the models of economists make it seem. World crude oil supply seems to be past peak now; it may be headed down significantly in the next few years. Central banks have been working hard to keep oil prices within an acceptable range for both producers and consumers, but this is becoming increasingly impossible.

We live in interesting times!

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