Sunday, February 26, 2017

Catastrophism is popular, but not necessarily right. Debunking the "Hill's Group" analysis of the future of the oil industry

"The Hill's Group" has been arguing for the rapid demise of the world's oil industry on the basis of a calculation of the entropy of the oil extraction process. While it is true that the oil industry is in trouble, the calculations by the Hill's group are, at best, irrelevant and probably simply plain wrong. Entropy is an important concept, but it must be correctly understood to be useful. It is no good to use it as an excuse to pander unbridled catastrophism. 

Catastrophism is popular. I can see that with the "Cassandra's Legacy" blog. Every time I publish something that says that we are all going to die soon, it gets many more hits than when I publish posts arguing that we can do something to avoid the incoming disaster. The latest confirmation of this trend came from three posts by Louis Arnoux that I published last summer (link to the first one). All three are in the list of the ten most successful posts ever published here.

Arnoux argues that the problems we have today are caused by the diminishing energy yield (or net energy, or EROI) of fossil fuels. This is a correct observation, but Arnoux bases his case on a report released by a rather obscure organization called "The Hill's Group." They use calculations based on the evaluation of the entropy of the extraction process in order to predict a dire future for the world's oil production. And they sell their report for $28 (shipping included).

Neither Arnoux nor the "Hill's Group" are the first to argue that diminishing EROEI is at the basis of most of our troubles. But the Hill's report gained a certain popularity and it has been favorably commented on many blogs and websites. It is t is understandable: the report has an aura of scientific correctness that comes from its use of basic thermodynamic principles and of the concept of entropy, correctly understood as the force behind the depletion problem. There is just a small problem: the report is badly flawed.

When I published Arnoux's posts on this blog, I thought they were qualitatively correct, and I still think they are. But I didn't have the time to look at the details of the report of Hill's group. Now, some people did that and their analysis clearly shows the many fundamental flaws of the treatment. You can read the results in English by Seppo Korpela, and in Spanish by Carlos De Castro and Antonio Turiel.

Entropy is a complex subject and delving into the Hill's report and into the criticism to it requires a certain effort. I won't go into details, here. Let me just say that it simply makes no sense to start from the textbook definition of entropy to calculate the net energy of oil production. The approximations made in the report are so large to make the whole treatment useless (to say nothing of the errors it contains). Using the definition of entropy to analyze oil production is like using quantum mechanics to design a plane. It is true that all the electrons in a plane have to obey Schroedinger's equation, but that's not the way engineers design planes.

Of course, the problem of diminishing EROEI exists and can be studied. The way to do that is known and it is based on the "life cycle analysis" (LCA) of the process. This method takes into account entropy indirectly, in terms of heat losses, without attempting the impossible task of calculating it from first principles. By means of this method we can see that, at present, the EROEI of oil production is not so bad as described by Hill/Arnoux. It still provides a reasonable energy return on investment (EROEI) as you can read, for instance, in a recent paper by Brandt et al

But if producing oil still provides an energy return, why is the oil industry in such dire troubles? (see this post on the SRSrocco report, for instance). Well, let me cite a post by Nate Hagens:

In the last 10 years the global credit market has grown at 12% per year allowing GDP growth of only 3.5% and increasing global crude oil production less than 1% annually. We're so used to running on various treadmills that the landscape doesn't look all too scary. But since 2008, despite energies fundamental role in economic growth, it is access to credit that is supporting our economies, in a surreal, permanent, Faustian bargain sort of way. As long as interest rates (govt borrowing costs) are low and market participants accept it, this can go on for quite a long time, all the while burning through the next higher cost tranche of extractable carbon fuel in turn getting reduced benefits from the "Trade" creating other societal pressures.
Society runs on energy, but thinks it runs on money. In such a scenario, there will be some paradoxical results from the end of cheap (to extract) oil. Instead of higher prices, the global economy will first lose the ability to continue to service both the principal and the interest on the large amounts of newly created money/debt, and we will then probably first face deflation. Under this scenario, the casualty will not be higher and higher prices to consumers that most in peak oil community expect, but rather the high and medium cost producers gradually going out of business due to market prices significantly below extraction costs. Peak oil will come about from the high cost tranches of production gradually disappearing.
I don't expect the government takeover of the credit mechanism to stop, but if it does, both oil production and oil prices will be quite a bit lower. In the long run it's all about the energy. For the foreseeable future, it's mostly about the credit

In the end, it is simply dumb to think that the system will automatically collapse when and because the net energy of the oil production process becomes negative (or the EROEI smaller than one). No, it will crash much earlier because of factors correlated to the control system that we call "the economy". It is a behavior typical of complex adaptative systems that are never understandable in terms of mere energy return considerations. Complex systems always kick back.

The final consideration of this post would simply be to avoid losing time with the Hill's report (to say nothing about paying $28 for it). But there remains a problem: a report that claims to be based on thermodynamics and uses resounding words such as "entropy" plays into the human tendency of believing what one wants to believe. Catastrophism is popular for various reasons, some perfectly good. Actually, we should all be cautious catastrophists in the sense of being worried about the catastrophes we risk to see as the result of climate change and mineral depletion. But we should also be careful about crying wolf too early. Unfortunately, that's exactly what Hill&Arnoux did and now they are being debunked, as they should be. That puts in a bad light all the people who are seriously trying to alert the public of the risks ahead.

Catastrophism is the other face of cornucopianism; both are human reactions to a difficult situation. Cornucopianism denies the existence of the problem, catastrophism denies that it can be solved or even just mitigated. Both attitudes lead to inaction. But there exists a middle way in which we don't exaggerate the problem but we don't deny it, either, and we do something about it!


  1. I've been wondering, if the declining net energy and hence net economic value of oil led to the collapse in oil prices in the last few years as claimed to have been predicted by the Hills Group model, how does it explain the low prices throughout the 1980s and 1990s. EROEI was certainly higher back then, but prices were not. Simply put, low EROEI or low energy surplus did not correlate with low prices, like it seemingly does now.

    1. there was a glut of oil back then. as you'd naturally expect that lead to low prices. same effect, different cause. its the reason low oil prices now confounds people and makes them think peak oil is wrong. because they naturally think 'low prices, glut of oil'. its a paradox, but one with a simple explanation.

    2. Yes that is the proximate cause - oversupply. I was trying to relate it to the Etp model, which predicts prices based on net economic value of oil produced at the margin.

    3. Oil production history shows there's no elasticity between volume and price, because oil is not just any product that you can replace with something else or do without altogether.

  2. Dr. Bardi,

    A couple questions:

    If the Etp model is invalid, why did you recently allow Dr. Louis Arnoux to promote the Etp model on your blog with three rambling consecutive guest blog posts? It makes no sense. And have you looked into Dr. Arnoux's background and credentials? He has been involved in some very shady, perhaps fraudulent business dealings which are very easily discovered with a simple google search. I look forward to reading your answers.



    1. As I say in my post, Arnoux's texts are qualitatively correct and they do identify a fundamental factor in the decline of the system.

    2. But you also say that catastrophism is bad. Dr. Arnoux's conclusions are clearly catastrophic. Yet you published his 3 guest posts and you now endorse his position as "qualitatively correct". You now claim to just have a problem with the Hill's Group report that it is based on. Can you see why this might seem a little inconsistent?

      How did you come to publish Dr. Arnoux's posts in the first place?

    3. Why are you so angry? I just thought that Arnoux's posts were interesting for the discussion and they did highlight a fundamental point. Catastrophism is bad when it is based on faulty data and interpretations, but we do face catastrophes so my point is that we should call wolf only when we have good data showing that the wolf is really coming. Then, we all try to understand what's going on, out there, and none of us is infallible.

      I see that you accuse Arnoux of shady and fraudulent business dealings, that may be, but please note that, 1) I know nothing about that and 2) Arnoux didn't use his posts to promote business deals (apart from the $28 cost of the report!)

    4. The Hill's Report is inadequate because catastrophism is bad when it is based on facts and interpretations of reality that are defective. I agree with you, I never bought the famous report, but ... how should we define those who sell hope based on this?


      (Sorry for my bad English, I use the translator)

    5. Why would you say that I am angry? I just asked you a couple of simple questions.

      I asked you how you came to host Dr.Arnoux's 3 guest blog posts in the first place. If you are unfamiliar with Dr.Arnoux's background, how did his guest posts get published on your blog? Is he your friend? Did he contact you? Did you contact him?

      Did you believe Dr. Arnoux was accurate at the time you published his 3 posts? If not, why did you publish them? If you did believe that Dr. Arnoux was accurate, but now you don't think so, what caused you to suddenly change your mind?

    6. Come on, Futilist, how many times are you asking me the same questions? And totally irrelevant questions: whether Arnoux contacted me or I contacted him, or if he is my friend. What does it matter? Calm down, please.

  3. "ShortOnOil" ( BW Hill) is an old friend of mine from my years on the Forum. He authored this report with some other engineers. It's a pretty good analysis IMHO, but by no means is it the Word of God Handed down on Stone Tablets. My min complaints with it are on timeline, I do not think Oil Price drops to $12 by 2020, that is too fast.

    However, the general trajectory and the outcomes are IMHO correct. It's a thermodynamic problem, and Renewables cannot and will not make up for the energy shortfall in anywhere near the timescale necessary to stave of a Collapse of Industrial Civilization. This battle is over.

    The battle now which must be fought by scientists is not to try and develop high tech renewables, but how to survive in a lower per capita energy future in a world with a higher AGT regime.

    Are there any scientists researching this?

    1. Glainty GlassaischeFebruary 27, 2017 at 8:25 PM

      Doomstead Diner,
      That's not really exclusive to Bedford Hill/shortonoil, though, is it? There are many who say similar things and have been saying so for quite some time, including on The Oil Drum, where shortonoil has also been, reading.

  4. Hello Professor Bardi - thanks for another great post. relative the last few paragraphs above and EROEI / economy discussions, this article by Nicole Foss may be of interest as her work has long included EROEI coincident with other factors that for a time enable the lunatics at the helm of the juggernaut an illusion of control, wild and careening ride that it is...

    1. Oh, yes, Nicole Foss is great. And I agree with the point she makes. The whole thing will go crashing down because of financial issue much before EROI goes lower than 1.

  5. Ugo
    The link to a recent report by Brandt et al is missing. Do you mean Adam Brandt?
    PS There has been a post at Peak Oil Barrel on the same subject. It seemingly misses Nate Hagen's point. Apparently some commenters regard the extra energy costs experienced by the extraction industry to be still trivial. Even in one example if EROEI goes as low as 10:1.

  6. Link fixed, sorry and thanks for alerting me. And, indeed, this is the whole point. The effect of diminishing EROEI is trivial until it goes down well below 5. But the system is under stress and sensitive to even small perturbation. The straw that broke the camel's back.....

  7. The math and physics in the report is above my pay scale,but they arrived at two conclusions
    1. There will be oil glut .
    2. The future trend of oil price will be down and they have derived a maximum affordability curve to show future pricing .
    Both conclusions have stood well for 2015,2016 and the 2 months of 2017 . Was it a fluke ? Maybe ,but it is a nugget and in life chance/luck do happen ,ask Louis Pasteur .The proof of the pudding lies in the eating .So far,so good . In my opinion the report is not catastrophic ,it just lays out the groundwork via maths/physics to arrive at its conclusions . It does not paint a post oil scenario,so how can maths/physics (correct or incorrect) be catastrophic ? Maths/physics is just that no more no less

    1. As I have commented earlier, the model does not explain the low prices in the 20th century when EROEI was still high. It only explains why they are low now and may head lower.

  8. quote: "Entropy is a complex subject and delving into the Hill's report and into the criticism to it requires a certain effort. I won't go into details, here. Let me just say that it simply makes no sense to start from the textbook definition of entropy to calculate the net energy of crude oil."

    So you haven't read the report?
    It's much to complex to explain to anyone why it's wrong?
    We should just take your word for it, that it wrong?

    Sorry but that doesn't work for me, so far in everything I've been able to read the math of the ETP model holds up and it's output from 2+ years ago has correctly predicted the average price since that time.

    1. There are three links to reports that explain why the Hill's report is wrong. Just click!

    2. I've read all three links, as I said in the above post.

      All three use the same basic reasons for the ETP model to be wrong but when I compare their reasons as to why the ETP model is wrong they don't stand up.

      in the report by Seppo Korpela
      Next comes the assumption that at all times

      chart/It is based on the observation that because at the end of oil production when the reservoir has been completely depleted the flow will stop and nothing much takes place, then both of these terms are zero. After cancelling these terms the entropy production is seen to be related to the heat transfer. But his assumption is clearly unjustified while the oil is being extracted and these two terms do not cancel each other. The neglect of the terms leads to an equation that omits the entropy production that is caused by the irreversibilities of the oil flow through the permeable reservoir rock.

      That's a nice statement, but it's "HIS" statement and not part of the ETP report. He then saids that because "HIS" statement makes no sense that the ETP model must be wrong.

      I'm not buying it, math is not that hard.

  9. Professor Bardi
    I think you have made some grievous mistakes.

    *Your preference for Life Cycle Analysis over the Thermodynamics of Steady State is just that...your preference. The ETP model includes as a cost the cost of replacing reserves as they are used. The method used in the ETP model is similar to what one might use for a biological system...that is, the parents have to provide for the birds need to look for caterpillars to feed the young. Now, if, as Hubbert assumed, we have a boundless supply of nuclear energy just waiting in the wings, a Life Cycle study would be appropriate. But since oil is part of the very biological business of keeping humans alive and functioning, there is nothing wrong with the ETP method. Whichever method is used, the user is responsible for understanding the assumptions and applying them appropriately.
    *You fail to see that the numbers quoted by Nate Hagens MIGHT just have a more fundamental cause than 'just because'. If the falling value of energy, and particularly oil, as displayed by the output from the ETP model is correct, then we would expect the numbers that Hagens quotes. Hagens is not 'disproving' the ETP model.
    *After accusing other people of confusing the EROEI methodology, you fall into the same trap. The ETP model does not claim that EROEI is going below 1. As estimated from the ETP model, the 'dead state' is arrived at when the EROEI is around 7 (as I remember). Such numbers are reasonably consistent with what Charles Hall and others have called 'extended EROEI'. That is, they count the costs beyond the well-head. The ETP methodology estimates that, with a well-head EROEI of 7, we will no longer be able to sustain the industrial economy as it is presently configured.
    *While the ETP model does not model the human reaction to the recognition that the economic and social system cannot go on much longer as it has been going for the last decades and centuries, Mr. Hill has been very clear that he thinks the situation is dire. The oil companies could lose enormous amounts of equity values overnight. The recognition would reverberate through the economy and the social system. The ETP model tells us something about the physical world, which we must interpret in terms of the financial and social world.
    *I know that you are committed to the notion that wind and solar can save us from this fate. Yet your response to Hall and Prieto amounted to obfuscation...using the poorly defined concept of EROEI to sow yet more confusion.

    Don Stewart

  10. This was a rash post. The links that are posted to refute the hills group don't make sense.

  11. A lively display of opinions but little analysis but what damage or concern is there that if a analysis is published as a matter for thought about a problem but errors or problems refute the analysis? The problem still remains a problem. Conflating proper science with economic analysis is always fraught because economics is dogma not science. Are the two subjects interrelated? you bet, the former is construed as catastrophism the latter as cornucopism, yet the problem remains, our use of energy. I personally had significant problems equating the Hills report to a useable unified theory of human activity, too many variables to consider which is why economic theory suffers the same problem it is neither unified or coherent and at times delusional. It tells me more about about our real problem, viewing the world through a monetary lense when in fact it is a complex interaction of various dynamic systems, biological and man made, a complex interaction of human behaviours imposed on these systems and lastly time. The facts are simple, over a long period of time human systems have used various forms of energy to produce and sustain life for ourselves namely through; food, shelter and comfort - we know all resources are finite and we know enough to understand that most resources once exhausted are gone for ever, in terms of the human life span or existence. I see no problem with discussing the issues but there is no value to be had to clinging to ideas that do not work or philosophical views that are faulty or spending valuable time in faulty arguments about problems. Here's what we know - the earth cannot support the level of human biomass density it has within the current system of the distribution of resources nor any further significant increase because we are using up the resources in a wasteful and destructive manner. So we need to share and simplify what we do and have and it seems the only means we have proven to do this over time is to use violence and deceit to not share and that is the other wicked problem.

  12. I did take an interest enough to buy the full HG report, and I found it to be less than clear. Reading the critical links above, I agreed that the steps of "curve" rotation" to be not explained, and the function relating energy of extraction with individual well age accords with expectations, but logical, analytical derivation looks fudged. The steps involving computer numerical models (without well documented source), suggest that its a numerical model, with a choice of functions that approximate some aspects of these complex physical systems, with some fudged assumptions, and we can all see the many graphs. So it would be best to publish the data, and numerical methods, and steps, rather than claim strict physics validity.

    At least the HG report poses the old questions. How does the Petroleum Processing System use up specific previous outputs of the PPS, as the individual wells age? How to model these energy / production costs of extraction? Is this a usefully described function of the fraction of total extraction of a reservoir? How does it relate to the real global PPS distributions and history?

    Since oil does make the global transport systems go around, and our food calories and water supply include a big fraction of oil, a large part of global economy should be included as part of the PPS, and we know it is so dependent.

    As cheap oil supply fails to grow, the "wealth pumps" of the developed world, afford ever less of oil-powered economic luxuries.

    Forced transition appears to happening, but is masked by current political pretense, and the ability to bring down the standard of living (oil energy) of increasing numbers of people, before various economic parts fail.
    Perhaps there is a lot of fat to trim away first, as falls in economic employment produces falls in oil demand.

    Production costs of various oil fields do exhibit a yearly exponential increase, reported to range around 5 - 10%. The fact that costs exhibit exponential rise tells us that our systems are unstable, subject to "vicious circle" feedbacks, and oil must become unaffordable. The current unstable economic states of the global system, and those of big oil, says as does nearly everyone else, that big change is happening.

  13. Interesting graphical analysis (in italian)

    1. An analysis, see link below, published yesterday, is also about Bakken. Geophysical factors including loss of reservoir energy are given as reasons. At some point the costs to drillers including energy costs force the drillers to stop or go elsewhere.

      I have been following for 3 years now the sequence of forward looking charts for a model of Bakken production published by Verwimp on POB. His model interestingly does not use a 'price term'. The results this summer will show if the prediction of rapid and continuing decline is confirmed. Art Berman's analysis (link above) also sees decline.

  14. Hello,

    could someone please summarize the 'substantial' critique the comments that Ugo linked have regarding the ETP-Model? Its is picking the numbers - or do they propose that we do not have an growing net-energy problem? Are they proposing that the whole underlying reasoning in the ETP-Model does not hold - or is it only off by a certain factor?

    I mean there are so many ERoEI Studies out in the world, proposing ERoEI for the same stiff with sometimes a factor of 10 difference. Has the ETP-Model the same usefulness as all the ERoEI studies at hand? Is it better? Is it worse? Does the problem it tries predicts until 2026/2030 can happen later - say not in 10 years, but in 50 years? or not at all?

    For me, the articles linked are long - and I understand the math to the same degree as in the ETP-Model... basically zero. The comment from 'Carlos de Castro Carranza' I find in many aspects irritating, for example point 14 - as Grapth 16 shows ERoEI per $ Barrel and the factor "2" is basically a kind of Systemic-Total-ERoEI (but not per $ Barrel). Still, I find it confusing, too - that the THG uses the term ERoEI in different manners throughout their (full) report.



Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014)