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Nate Hagens: We're Not Facing A Shortage of Energy, But A Longage of Expectations

By Chris Martenson
August 3rd, 2011

This week's interview is one of the most important discussions we've had to-date on energy, its supply/demand dynamics, and the tremendous impact it has on our economic and social identity. It is clear now that we are staring at a future of declining output at a time the world is demanding an ever-increasing amount. 

Nate Hagens, former editor of the respected energy blog, The Oil Drum, gives a fact-packed update on where we are on the peak oil timeline. But interestingly, he explains how he sees the core issue as less about the actual amount of energy available to the world, and more about our assumptions about how much we really need:

"Weíre not really facing a shortage of energy, weíre facing a longage of expectations. And the sooner that we as individuals or a nation recognize that the future is going to see much lower consumption than today and prepare for that, psychological resilience is going to be really important; because if no one is psychologically prepared, people are going to freak out when some of these freedoms start to go away.

Look, the average American consumes around 230,000 kilocalories a day of energy. The body itself consumes about 2,500 to 3,000 of those, endosmotically, within the body. So exosmotically outside of the body, we consume 99% of our energy footprint. So if peak oil is upon us, or any issue with coal or natural gas, or the main fossil pixie dust that has subsidized our lifestyle for the last century, if that stuff declines twenty or thirty or even forty percent, itís not like weíre literally out of calorie availability. Itís just that our system is built on all this decadence and industry and trade and cross border transfers; it has all been built on a model that canít continue. Whatís going to break first is peopleís expectations of what they own, the digits in the bank and all of the financial claims. But those are just digits, theyíre abstract digits. The day that a financial system would be disrupted, nothing happens physically.

So I think if we drop our energy consumption quite a bit, nothing has to change other than our supply chains and the way that goods and medicine and water and sanitation and all that gets to the cities and towns and states. That has to be deeply thought about on a national level. But Iím optimistic - if we were sitting here and the average American used 10,000 calories a day of total energy, and we needed 3,000 for our bodily functions to continue, that would be a real problem because there wasnít much extra. But we have a huge amount of energy relative to what we need.

So I think there are two main things that need to happen - and of course, individuals can play a role in this - but one is we need to design some sort of future system that is an accurate barometer of what we really have on our natural capital balance sheets, relative to what we really need on our human behavior balance sheets. People are working on both sides of that.

Number two is we need some sort of bridge, some sort of mitigation towards a financial currency trade disruption, which very few people are working on. The fact that a large percentage of our economic output globally is traded: if thereís some problem with the Euro or the Yen or the Pound or the dollar, how does that stuff continue to get shipped every day, along with all the components and everything else that we need? In my discussions, very few people are looking at that. And so on a macro level, people need to start focusing on how supply chains look and what are ways around our current system so that we can guarantee at least basic necessity-type things to continue to reach our shores and be processed, etc."

In Hagen's opinion, successfully entering a post peak oil future necessitates a fundamental change in our social values:

"What are we driving for? What is the goal of a society and a goal of a culture? And it has been, for quite a while, profit that is supposed to trickle down. Once the assumption of growth goes away, then you have to start looking at different objectives and thatís the gorilla in the room that people are afraid to voice. And I think if they understood the energy-economic link better, they might start to come to that conclusion."

Also in this interview:

  • Why we've now reached the "biophysical gauntlet" where higher energy costs are handicapping future economic growth
  • The subtle yet critical relationship between debt and energy. And why our ignorance of it is worsening our collective situation.
  • The most probable implications of peak oil for the financial markets and asset valuations
  • What individuals (and society) should do to position for a future of lower available energy
  • Why 'self worth' is the new 'net worth'

Click the play button below to listen to Chris' interview with Nate Hagens (runtime 48m:56s):

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Or start reading the transcript below:

Chris Martenson: You know, I want to start with a little bit about peak oil, the idea that someday thereís going to be incrementally less oil flowing from the ground to use as we wish. In your estimation and experience, where are we in the peak oil story?

Nate Hagens: Well, there are a lot of details that people will argue about. The bottom line is that weíve reached a level where supply cannot continue to keep up with demand increase. Weíve been on a plateau for five or six years now, where oil supply has become inelastic: more demand, higher prices will not bring out more supply. And there are interesting sub-stories to that. For example, the EIA and the IEA, the data that they report show that we just recently hit an all-time high in oil production. If you include tar sand, biofuels, natural gas, plant liquids, etc., weíre around 88 million barrels a day. But if you look at some other data sources, like the JODI, the Joint Oil Database Initiative, that is a compilation of national governments reporting their own oil production, thereís about a three to four million dollar difference in total production. So we donít really know the source of EIA and IEA. We assume itís IHS CERA data, but thereís a big gap there. And if you look at the JODI data, weíve still peaked in 2006 and have not regained that peak. Now if youíre just talking oil, both data sources agree that 2006 is still the peak of global oil production.

Chris Martenson: Is that where you are? So in your estimation, conventional oil has peaked? I think thatís in the rearview mirror, but youíre now going out and saying all liquids that we would call oil; forget about the funny stuff out there, the ethanol and whatnot, but in terms of stuff that comes out of the ground we would call oil, weíve peaked?

Nate Hagens: Well, Iíve stopped paying attention to that, Chris, because I donít think it really matters. I think peak oil is a constraint going forward, but itís not the real driver on the energy side. Itís that our marginal cost keeps going up for liquid fuels, which are basically the hemoglobin of global trade and global commerce, so thatís relevant. But whether we have another million, or two million, or two million less isnít the real story. Weíre not going to be able to meaningfully grow something that the entire world depends on, and so I think all this bickering about which month or which year is the highest is missing the point. And then Iím sure, weíll probably touch on it later, the greater threat right now is not peak oil, but peak debt or peak credit, and thatís the much more clear and present danger. But you mentioned ethanol, and there was a stat that came up today, I just wanted to point it out. As of now, corn for food is the number two use of corn in this country. We now use more corn to create ethanol than we do for food. And we produce about a million barrels of ethanol a year. Each of those barrels, of course, has, because of the BTU content, a lot less energy than a barrel of oil, around 70%. So weíre using half of our corn supply to produce one million barrels of ethanol, when we use nineteen million barrels a day of oil. So itís kind of a conversion of corn, water, soil, natural gas and coal into liquid fuels in order to become less dependent. But itís only a drop in the bucket relative to our total consumption.

Chris Martenson: Right. So here we have this magic substance, itís the hemoglobin of global trade, as you said, meaning itís the carrier thatís providing the oxygen, as it were, to have the global economy function. We will get to that peak debt connection in just a second. But this is a really important point to me, the idea that what we need is we need more oil or liquid fuels if we want to broaden it on a daily, yearly, monthly, whatever basis we want, than we did last year, day, month or whatever, because we want our economy to keep growing and thatís what we understand and know and love. In your estimation, though, we are now facing physical constraints that are going to prevent us from growing the supply of oil at the higher level, and on a more granular level, you used marginal cost of production, but that itself might be a proxy for increasing energy costs to go out and get energy; however we look at it, money being a great proxy for energy. So letís use that. Energyís going to become more expensive going forward and thereís going to be slightly less of it. Those are two pieces of the story, in your mind, from now stretching into the future.

Nate Hagens: Yeah, thatís right. And, you know, the main reason thatís a problem is because our entire system is based on the incorrect assumption that energy, which underpins every single physical service transaction we have in this economy, is substitutable. You can substitute capital or labor for it. And in reality, thatís not true. If you donít have energy, you donít have an economic transaction.

So if it becomes either more expensive or unavailable, both of those have deleterious impacts to economic growth. And weíre kind of in, what I call the ďbiophysical gauntletĒ right now, which is that oil, weíve found all the Beverly Hillbilly Oil 60 to 70 years ago that was bubbling right under the surface, and now we have to drill deeper, drill further offshore; create things that arenít really oil and process them into oil, like tar sands and oil shale. And all these things cost a lot more for the energy companies to produce. And society is reaching the point of being insolvent because of our claims and liabilities. And eventually we get to a point where the oil companies need higher and higher oil price in order to make a profit, but society can afford less and less. And at some point those two prices of oil cross and we have a real problem. You know, right now, the marginal barrel of oil costs between $70 and $90, so thereís a little bit of a cushion in there now. But a lot of people say above a hundred dollar oil, it has significant economic headwinds. So at some point there, dollars donít become an accurate measure of our real natural resource balance sheet.

And as you know, part of the tenets of biophysical economics are measuring our natural resource endowments in natural resource terms, themselves. For example, Energy Return On Investment (EROI) is how much energy it takes to get one unit of energy in our society. And 70, 80 years ago, we would invest one barrel of energy to get out a hundred barrels of oil and that 100:1 ratio declined to 30:1 in the 1970ís and it was around 10:1 in the year 2000, and the EIA stopped producing data on how much energy it takes to get energy. So we can kind of interpolate it now, but itís clearly under ten in single digits.

And you eventually get to a point, even if oil is $100,000 dollars a barrel, or $1 million dollars a barrel, if it takes one barrel of oil to get out barrel of oil, youíre kind of out of gas at that point.

Chris Martenson: So the energy return on energy invested, or EROI, has been declining steadily. I want to just back up for a second. So here we are, if we scan the papers this morning, you know, weíve got a debt ceiling sort of mini-drama going on in D.C.. Weíve got Italyís bond spreads blowing out. Greece is clearly in trouble. Everybodyís familiar with the whole Portugal/Ireland story. Japan is in a pickle. China looks like itís getting there. And as we scan across the landscape, we canít really find any corner of the globe at this point, at least in all the advanced economies, where things look like theyíre working as they used to. So if we just have our economic hats on, I believe this is a very, very confusing period of time. I know our economic high priests and priestesses are waiving their magic money wands wondering, I bet, why isnít this working? You know, where is unemployment? Why is it stuck there? Whereas, if we step over here into the energy world and put our EROI hats on and we say look, this is perfectly predictable, I think. When you have less available net energy, these are the sorts of problems you might experience and expect. Does that make sense to you, or is that even remotely how you see it?

Nate Hagens: It makes absolute sense. We need energy to create our physical realities and create our economic growth and trade for transport, everything. If the energy sector requires a greater and greater chunk of that energy, we have less available for the rest of discretionary society. And once that constraint exists and even accelerates, you need to respond to that. And the way we responded to that was increasing our debt which, of course, as you know, is pretty much created by a pen stroke. So that can temporarily offset energy shortages at a cost of a steeper decline, because debt actually functions as a spacial and temporal reallocater of resources, away from the periphery towards the center and away from the future towards the present. So thereís a very subtle but important relationship between debt and energy. And the problem is, is that most of, as you term, economic priests and priestesses, donít have training in the biophysical economic world, and they treat everything in monetary terms. And we just throw more money at the problem, and itíll go away. Well, our energy and especially our net energy story is getting worse. So weíre increasing our money supply while our energy supply is declining and, yeah, thatís not a good situation.

Click here to read the rest of the transcript.


Note: Listeners interested in the conclusions expressed within this interview will also want to read Chris' recent report on Past Peak Oil - Why Time is Now Short, which takes a deep dive into the data behind the supply and demand imbalances in the global market for oil.



Nate Hagens is a well-known authority on global resource depletion. Until recently, he was lead editor of The Oil Drum, one of the most popular and highly-respected websites for the analysis and discussion and global energy supplies, and the future implications of the energy decline that we are facing. Nateís presentations address the opportunities and constraints that we face in the transition away from fossil fuels.

Nate holds a Masterís Degree in Finance from the University of Chicago and recently completed his PhD in Natural Resources at the University of Vermont. Previously, he was President of Sanctuary Asset Management and a Vice-President at the investment firm Solomon Brothers and Lehman Brothers. He is a frequently featured presenter and active participant for the Association for the Study of Peak Oil and Gas (ASPO).


By Chris Martenson
August 3rd, 2011

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