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Epic Disappointment

IMG Auteur
Published : November 19th, 2012
1413 words - Reading time : 3 - 5 minutes
( 18 votes, 3.2/5 ) , 5 commentaries
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Category : Editorials

 

 

 

 

Those inhabiting the economic wish-space got a case of the vapors last week when the Paris-based International Energy Agency (IEA) published an annual report stating that the USA would overtake Saudi Arabia as the world's leading oil producer and reach the long-touted nirvana of "energy independence." The news was greeted in this country with jubilation. Thus, peak credulity meets peak bullshit.


It's been clear for a while that authorities in many realms of endeavor - politics, economics, business, media - are very eager to sustain the illusion that we can keep our way of life chugging along. But under the management of these elites, the divorce between truth and reality is nearly complete. The financial system now runs entirely on accounting fraud. Government runs on the fumes of statistical fraud. The business of oil and gas runs on public relations fraud. And the media runs on the understandable wish of the masses to believe that all the foregoing illusions still work to maintain the familiar comforts of modern life (minus Hostess Ho-Hos and Twinkies, alas).


And so the story has developed that the shale oil plays of North Dakota and Texas, which started ramping up around 2005 - the same year the world hit the wall of peak conventional oil - and the shale gas plays in Texas, Louisiana, Pennsylvania, New York, and Ohio would enable American "consumers" to drive to WalMart effectively forever.


Now, it happens that the particulars of oil and gas production are so abstruse that the editors of The New York Times, The Bloomberg News Service, CNN, and a score of other mass media giants swallowed the IEA report whole, with fanfares and fireworks, and a nation afflicted with doubt about its future swooned into the first week of the holidays in celebration mode - we're soon to be number 1 again, and the future is secure! Have a nice Thanksgiving and Christmas and prepare to sober up in 2013. When the truth finally emerges from this morass of dissimulation, the disappointment will be epic.


Here's why the shale oil story is not the "game changer" that the wishful claim it is: the price required to get it out of the ground (between $80-90 a barrel) will crush the US economy. Since prices are already in that range, the economy is already being crushed. The result is an economy in more-or-less permanent contraction. As demand for oil falls with declining economic activity the price of oil falls - below the level that makes it worthwhile to conduct expensive shale oil drilling and fracking operations.


Meanwhile, in the background, as economies contract and economic "growth" of the type our system requires no longer happens, the problems in finance and banking get a lot worse. This is largely because interest on borrowed money can no longer be paid back. Loans are defaulted on. As this happens, banks become insolvent. Governments play games with public money - including "money" they "create" out of thin air - to prop up the banks. None of it alters the sad fact that there is not enough real money in the system. The result of all these desperate monkeyshines is the impairment if capital formation. That is, the failure to accumulate new wealth. The lack of new wealth, along with declining prospects for the repayment of loans, leads to a shortage of credit, especially to businesses that require large supplies of it to keep gigantic complex operations like shale oil and gas going


Shale oil (and shale gas) share some problematical properties. The cost of drilling each well is a big number, $6-8 million. The wells deplete very rapidly, over 40 percent after one year in the Bakken formation of North Dakota. The oil is not distributed equally over the whole play but exists in "sweet spots." The sweetest sweet spots were drilled the earliest and the quality of the remaining potential drill sites is already in decline. The current trend shows declining first-year productivity in new wells drilled since 2010 running at 25 percent.


There are over 4300 wells shale oil in the Bakken formation of North Dakota producing about 610,000 barrels a day. In order to keep production up, the number of wells will have to continue increasing at a faster rate than previously. This is referred to as "the Red Queen syndrome" which alludes to the character in Alice in Wonderland who famously declared that she had to run faster and faster just to stay where she is. The catch to all this is that the impairments of capital formation are working insidiously in the background to guarantee that the money will not be there to set up the necessary wells to keep production at current levels. In other words, shale oil (and shale gas) are Ponzi schemes. The story in the Eagle Ford play in Texas is very similar.


I haven't even mentioned the concerns about fracking and its effect on ground water, and won't go into it here, except to acknowledge that it presents an additional range of concerns.


The current price situation in shale gas is different than shale oil. The drilling frenzy in shale gas produced a glut, which drove down prices from a $13 a unit (thousand cubic feet or mcf) to around $2 at its low point earlier this year. That's way below the price that is economically rational to drill and frack for it. The price collapse has played havoc among the companies engaged in shale gas, though it has been a boon to customers. A lot of the drilling equipment has moved to the North Dakota oil fields. There will be less shale gas in the period ahead and the price will go up. It has got to go above about $8 a unit or there will be no reason for any company to be in the shale gas business. But as is always the case in such a correction, the price will surely overshoot $8, at which point it will become unaffordable to its customers. The volatility alone will make the business of shale gas drilling impossible to maintain. Forget about the USA becoming a major gas exporter.


You probably get the point by now, so I will only add a couple of out-of-the-box considerations vis-à-vis the prospect of the USA becoming energy independent.


-- Production is getting so low in the Prudhoe Bay fields of Alaska that the famous pipeline may not be able to operate. If the flow of oil reaches a certain low volume, it takes longer to make the long journey. The oil cools down and gets sludgy and some of the water that travels with it will freeze. This could destroy the pipeline. The capital is not there to retrofit the pipeline for a depleting oil field in a region that is difficult and expensive to work in.


-- Exporting countries (the ones that send us oil) are depleting their reserves and using more of their own oil, resulting in annually declining export rates. China, India, and other still-modernizing nations compete for a growing share of that declining export flow.


-- I have barely hinted at the geopolitical forces roiling behind the sheer business dynamics. But here's an interesting one: the time will come when the US will invoke the Monroe Doctrine to prevent Canada from sending its oil and tar-sand byproducts to nations other than ourselves. Just wait.


Finally, I have one flat-out prediction, one I have made before but deserves repeating: Japan will be the first society to consciously opt out of being an advanced industrial economy. They have no other apparent choice really, having next-to-zero oil, gas, or coal reserves of their own, and having lost faith in nuclear power. They will be the first country to enter a world made by hand. They were very good at it before about 1850 and had a pre-industrial culture of high artistry and grace - though, granted, all the defects of human psychology.


I don't think the US can make that transition in an orderly way. We're too stricken with techno-narcissism and grandiosity. What troubles me is how we will greet the epic disappointment that waits for us when we discover that the journey to WalMart is over. My guess is that being predisposed to superstition and religious fanaticism, the American public will violently reject science and rationality and retreat into a world of shadows. We're already well on our way. The IEA report will just accelerate things.


 

 

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Addenda to previous comment...seems like BILLIONAIRE Wilbur Ross strongly believes that the USA has a bright future with respect to its energy needs. ( see KWN interview) Good chance that Peak Oil is Peak Bullshit.  Read more
S W. - 11/21/2012 at 6:19 AM GMT
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Addenda to previous comment...seems like BILLIONAIRE Wilbur Ross strongly believes that the USA has a bright future with respect to its energy needs.
( see KWN interview)

Good chance that Peak Oil is Peak Bullshit.
Rate :   5  0Rating :   5
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Golly gosh-gee, I sure hope Jim C. is right. I don't know how I'd survive without my $67,000 8 passenger luxury SUV to take me to my mountain-top home at 4500 feet and back every day, where I mow my lawn with a 32 HP zero-turn mower, and chase squirrels in my $15,000 4WD 4 seat trail monster, then on weekends drive my $150,000 Motor home 300 miles to the NASCAR race to run my 10,000 watt generator all weekend, but only the weekends I'm not at my $500,000 lake property running my $35,000 450 HP Inboard endlessly around the perimeter destroying everyones right to quiet with its open headers.... Life would REALLY suck!!
Rate :   5  2Rating :   3
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I am just trying to figure out why on earth the Paris based IEA would publish an annual report that has no credibility and is bullshit... according to JHK.
Rate :   2  1Rating :   1
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It isn't quantity that matters, such as Keathly Canyon, but costs and transporting it to market. Keathly is 250 miles south of New Orleans. How can anyone move enough of this oil fast enough to make a market difference?

The shale oil/gas play might be facing a serious problem. Shale is tight, so the economic volume might not exist and the fields become depleted far faster than imagined. And yes the future yield curve is imagined.

Cheap energy is over. Deal with it.
Rate :   1  5Rating :   -4
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Doomster Kunstler (rhymes!) is wrong. Here are a few interesting oil production facts.

1) There have been massive oil discoveries recently: British Petroleum recently discovered Tiber Field on Keathly Canyon Block 102 is estimated to contain 3-6 billion barrels of recoverable oil. Other recently recently discovered fields are expected to come on line at more than 100,000 bbl/day.

2) According to the American Petroleum Institute the current estimate of undiscovered technically recoverable Federal resources of crude oil currently stands at 116.3 billion bbls.

3) Canada expects to double its oil production by 2030.

4) Based on the gov’t's track record, the estimated 116 billion barrels of undiscovered oil under Federal lands is more likely to be 680 billion barrels. That’s close to 100 years worth of current US consumption – And that’s just the undiscovered oil under Federal mineral leases.

And we're not even talking coal or natural gas.
Rate :   9  2Rating :   7
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