The Real Reason behind the Oil Price Collapse

14 03 2015

This article originally appeared at TomDispatch.com. To stay on top of important articles like these, sign up to receive the latest updates from TomDispatch.com.

Michael T. Klare on Energy Policy and Sustainability

Michael T Klare

By Michael T Klare

Many reasons have been provided for the dramatic plunge in the price of oil to about $60 per barrel (nearly half of what it was a year ago): slowing demand due to global economic stagnation; overproduction at shale fields in the United States; the decision of the Saudis and other Middle Eastern OPEC producers to maintain output at current levels (presumably to punish higher-cost producers in the US and elsewhere); and the increased value of the dollar relative to other currencies. There is, however, one reason that’s not being discussed, and yet it could be the most important of all: the complete collapse of Big Oil’s production-maximizing business model.

Until last fall, when the price decline gathered momentum, the oil giants were operating at full throttle, pumping out more petroleum every day. They did so, of course, in part to profit from the high prices. For most of the previous six years, Brent crude, the international benchmark for crude oil, had been selling at $100 or higher. But Big Oil was also operating according to a business model that assumed an ever-increasing demand for its products, however costly they might be to produce and refine. This meant that no fossil fuel reserves, no potential source of supply—no matter how remote or hard to reach, how far offshore or deeply buried, how encased in rock—was deemed untouchable in the mad scramble to increase output and profits.

In recent years, this output-maximizing strategy had, in turn, generated historic wealth for the giant oil companies. Exxon, the largest US-based oil firm, earned an eye-popping $32.6 billion in 2013 alone, more than any other American company except for Apple. Chevron, the second biggest oil firm, posted earnings of $21.4 billion that same year. State-owned companies like Saudi Aramco and Russia’s Rosneft also reaped mammoth profits.

How things have changed in a matter of mere months. With demand stagnant and excess production the story of the moment, the very strategy that had generated record-breaking profits has suddenly become hopelessly dysfunctional.

To fully appreciate the nature of the energy industry’s predicament, it’s necessary to go back a decade to 2005, when the production-maximizing strategy was first adopted. At that time, Big Oil faced a critical juncture. On the one hand, many existing oil fields were being depleted at a torrid pace, leading experts to predict an imminent “peak” in global oil production, followed by an irreversible decline; on the other, rapid economic growth in China, India and other developing nations was pushing demand for fossil fuels into the stratosphere. In those same years, concern over climate change was also beginning to gather momentum, threatening the future of Big Oil and generating pressures to invest in alternative forms of energy.

A “Brave New World” of Tough Oil

No one better captured that moment than David O’Reilly, the chairman and CEO of Chevron. “Our industry is at a strategic inflection point, a unique place in our history,” he told a gathering of oil executives that February. “The most visible element of this new equation,” he explained in what some observers dubbed his “Brave New World” address, “is that relative to demand, oil is no longer in plentiful supply.” Even though China was sucking up oil, coal and natural gas supplies at a staggering rate, he had a message for that country and the world: “The era of easy access to energy is over.”

To prosper in such an environment, O’Reilly explained, the oil industry would have to adopt a new strategy. It would have to look beyond the easy-to-reach sources that had powered it in the past and make massive investments in the extraction of what the industry calls “unconventional oil” and what I labeled at the time “tough oil“: resources located far offshore, in the threatening environments of the far north, in politically dangerous places like Iraq, or in unyielding rock formations like shale. “Increasingly,” O’Reilly insisted, “future supplies will have to be found in ultradeep water and other remote areas, development projects that will ultimately require new technology and trillions of dollars of investment in new infrastructure.”

For top industry officials like O’Reilly, it seemed evident that Big Oil had no choice in the matter. It would have to invest those needed trillions in tough-oil projects or lose ground to other sources of energy, drying up its stream of profits. True, the cost of extracting unconventional oil would be much greater than from easier-to-reach conventional reserves (not to mention more environmentally hazardous), but that would be the world’s problem, not theirs. “Collectively, we are stepping up to this challenge,” O’Reilly declared. “The industry is making significant investments to build additional capacity for future production.”

On this basis, Chevron, Exxon, Royal Dutch Shell and other major firms indeed invested enormous amounts of money and resources in a growing unconventional oil and gas race, an extraordinary saga I described in my book The Race for What’s Left. Some, including Chevron and Shell, started drilling in the deep waters of the Gulf of Mexico; others, including Exxon, commenced operations in the Arctic and eastern Siberia. Virtually every one of them began exploiting US shale reserves via hydro-fracking.

Only one top executive questioned this drill-baby-drill approach: John Browne, then the chief executive of BP. Claiming that the science of climate change had become too convincing to deny, Browne argued that Big Energy would have to look “beyond petroleum” and put major resources into alternative sources of supply. “Climate change is an issue which raises fundamental questions about the relationship between companies and society as a whole, and between one generation and the next,” he had declared as early as 2002. For BP, he indicated, that meant developing wind power, solar power and biofuels.

Browne, however, was eased out of BP in 2007 just as Big Oil’s output-maximizing business model was taking off, and his successor, Tony Hayward, quickly abandoned the “beyond petroleum” approach. “Some may question whether so much of the [world’s energy] growth needs to come from fossil fuels,” he said in 2009. “But here it is vital that we face up to the harsh reality [of energy availability].” Despite the growing emphasis on renewables, “we still foresee 80% of energy coming from fossil fuels in 2030.”

Under Hayward’s leadership, BP largely discontinued its research into alternative forms of energy and reaffirmed its commitment to the production of oil and gas, the tougher the better. Following in the footsteps of other giant firms, BP hustled into the Arctic, the deep water of the Gulf of Mexico, and Canadian tar sands, a particularly carbon-dirty and messy-to-produce form of energy. In its drive to become the leading producer in the Gulf, BP rushed the exploration of a deep offshore field it called Macondo, triggeringthe Deepwater Horizon blow-out of April 2010 and the devastating oil spill of monumental proportions that followed.

Over the Cliff

By the end of the first decade of this century, Big Oil was united in its embrace of its new production-maximizing, drill-baby-drill approach. It made the necessary investments, perfected new technology for extracting tough oil, and did indeed triumph over the decline of existing, “easy oil” deposits. In those years, it managed to ramp up production in remarkable ways, bringing ever more hard-to-reach oil reservoirs online.

According to the Energy Information Administration (EIA) of the US Department of Energy, world oil production rose from 85.1 million barrels per day in 2005 to 92.9 million in 2014, despite the continuing decline of many legacy fields in North America and the Middle East. Claiming that industry investments in new drilling technologies had vanquished the specter of oil scarcity, BP’s latest CEO, Bob Dudley, assured the world only a year ago that Big Oil was going places and the only thing that had “peaked” was “the theory of peak oil.”

That, of course, was just before oil prices took their leap off the cliff, bringing instantly into question the wisdom of continuing to pump out record levels of petroleum. The production-maximizing strategy crafted by O’Reilly and his fellow CEOs rested on three fundamental assumptions: that, year after year, demand would keep climbing; that such rising demand would ensure prices high enough to justify costly investments in unconventional oil; and that concern over climate change would in no significant way alter the equation. Today, none of these assumptions holds true.

Demand will continue to rise—that’s undeniable, given expected growth in world income and population—but not at the pace to which Big Oil has become accustomed. Consider this: in 2005, when many of the major investments in unconventional oil were getting under way, the EIA projected that global oil demand would reach 103.2 million barrels per day in 2015; now, it’s lowered that figure for this year to only 93.1 million barrels. Those 10 million “lost” barrels per day in expected consumption may not seem like a lot, given the total figure, but keep in mind that Big Oil’s multibillion-dollar investments in tough energy were predicated on all that added demand materializing, thereby generating the kind of high prices needed to offset the increasing costs of extraction. With so much anticipated demand vanishing, however, prices were bound to collapse.

Current indications suggest that consumption will continue to fall short of expectations in the years to come. In an assessment of future trends released last month, the EIA reported that, thanks to deteriorating global economic conditions, many countries will experience either a slower rate of growth or an actual reduction in consumption. While still inching up, Chinese consumption, for instance, is expected to grow by only 0.3 million barrels per day this year and next—a far cry from the 0.5 million barrel increase it posted in 2011 and 2012 and its one million barrel increase in 2010. In Europe and Japan, meanwhile, consumption is actually expected to fall over the next two years.

And this slowdown in demand is likely to persist well beyond 2016, suggests the International Energy Agency (IEA), an arm of the Organization for Economic Cooperation and Development (the club of rich industrialized nations). While lower gasoline prices may spur increased consumption in the United States and a few other nations, it predicted, most countries will experience no such lift and so “the recent price decline is expected to have only a marginal impact on global demand growth for the remainder of the decade.”

This being the case, the IEA believes that oil prices will only average about $55 per barrel in 2015 and not reach $73 again until 2020. Such figures fall far below what would be needed to justify continued investment in and exploitation of tough-oil options like Canadian tar sands, Arctic oil and many shale projects. Indeed, the financial press is now full of reports on stalled or cancelled mega-energy projects. Shell, for example, announced in January that it had abandoned plans for a $6.5 billion petrochemical plant in Qatar, citing “the current economic climate prevailing in the energy industry.” At the same time, Chevron shelved its plan to drill in the Arctic waters of the Beaufort Sea, while Norway’s Statoil turned its back on drilling in Greenland.

There is, as well, another factor that threatens the wellbeing of Big Oil: climate change can no longer be discounted in any future energy business model. The pressures to deal with a phenomenon that could quite literally destroy human civilization are growing. Although Big Oil has spent massive amounts of money over the years in a campaign to raise doubts about the science of climate change, more and more people globally are starting toworry about its effects—extreme weather patterns, extreme storms, extreme drought, rising sea levels and the like—and demanding that governments take action to reduce the magnitude of the threat.

Europe has already adopted plans to lower carbon emissions by 20% from 1990 levels by 2020 and to achieve even greater reductions in the following decades. China, while still increasing its reliance on fossil fuels, has at least finally pledged to cap the growth of its carbon emissions by 2030 and to increase renewable energy sources to 20% of total energy use by then. In the United States, increasingly stringent automobile fuel-efficiency standards will require that cars sold in 2025 achieve an average of 54.5 miles per gallon, reducing US oil demand by 2.2 million barrels per day. (Of course, the Republican-controlled Congress—heavily subsidized by Big Oil—will do everything it can to eradicate curbs on fossil fuel consumption.)

Still, however inadequate the response to the dangers of climate change thus far, the issue is on the energy map and its influence on policy globally can only increase. Whether Big Oil is ready to admit it or not, alternative energy is now on the planetary agenda and there’s no turning back from that. “It is a different world than it was the last time we saw an oil-price plunge,” said IEA executive director Maria van der Hoeven in February, referring to the 2008 economic meltdown. “Emerging economies, notably China, have entered less oil-intensive stages of development.… On top of this, concerns about climate change are influencing energy policies [and so] renewables are increasingly pervasive.”

The oil industry is, of course, hoping that the current price plunge will soon reverse itself and that its now-crumbling maximizing-output model will make a comeback along with $100-per-barrel price levels. But these hopes for the return of “normality” are likely energy pipe dreams. As van der Hoeven suggests, the world has changed in significant ways, in the process obliterating the very foundations on which Big Oil’s production-maximizing strategy rested. The oil giants will either have to adapt to new circumstances, while scaling back their operations, or face takeover challenges from more nimble and aggressive firms.





Derrick Jensen interview at the Earth at Risk 2014 Conference

3 12 2014

 





The collapse of oil prices and energy security in Europe

17 11 2014

This is a written version of the brief talk I gave at the hearing of the EU parliament on energy security in Brussels on Nov 5, 2014. It is not a transcription, but a shortened version that tries to maintain the substance of what I said. In the picture, you can see the audience and, on the TV screen, yours truly taking the picture.

Ladies and gentlemen, first of all, let me say that it is a pleasure and an honour to be addressing this distinguished audience today. I am here as a faculty member of the University of Florence and as a member of the Club of Rome, but let me state right away that what I will tell you are my own opinions, not necessarily those of the Club of Rome or of my university.

This said, let me note that we have been discussing so far with the gas crisis and the Ukrainian situation, but I have to alert you that there is another ongoing crisis – perhaps much more worrisome – that has to do with crude oil. This crisis is being generated by the rapid fall in oil prices during the past few weeks. I have to tell you that low oil prices are NOT a good thing for the reasons that I will try to explain. In particular, low oil prices make it impossible for many oil producers to produce at a profit and that could generate big problems for the world’s economy, just as it already happened in 2008.

So, let me start with an overview of the long term trends of oil prices. Here it is, with data plotted from the BP site.

These data are corrected for inflation. You see strong oscillations, but also an evident trend of growth. Let’s zoom in, to see the past thirty years or so:

These data are not corrected for inflation, but the correction is not large in this time range. Prices are growing, but they stabilized during the past 4-5 years at somewhere around US 100 $ per barrel. Note the fall during the past month or so. I plotted these data about one week ago, today we are at even lower prices, well under 80 dollars per barrel.

The question is: what generates these trends? Obviously, there are financial factors of all kinds that tend to create fluctuations. But, in the end, what determines prices is the interplay of demand and offer. If prices are too high, people can’t afford to buy; that’s what we call “demand destruction”. If prices are too low, then it is offer that is destroyed. Simply, producers can’t sell their products at a loss; not for a long time, at least. So there is a range of prices which are possible for oil: too high, and customers can’t buy, too low, and companies can’t sell. Indeed, if you look at historical prices, you see that when they went over something like 120 $/barrel (present dollars) the result was a subsequent recession and the collapse of the economy.

Ultimately, it is the cost of production that generates the lower price limit. Here, we get into the core of the problem. As you see from the price chart above, up to about the year 2000, there was no problem for producers to make a profit selling oil at around 20 dollars per barrel. Then something changed that caused the prices to rise up. That something has a name: it is depletion.

Depletion doesn’t mean that we run out of oil. Absolutely not. There is still plenty of oil to extract in the world. Depletion means that we gradually consume our resources and – as you can imagine – we tend to extract and produce first the least expensive resources. So, as depletion gradually goes on, we are left with more expensive resources to extract. And, if extracting costs more, then the market prices must increase: as I said, nobody wants to sell at a loss. And here we have the problem. Below, you can see is a chart that shows the costs of production of oil for various regions of the world. (From an article by Hall and Murphy on The Oil Drum)

Of course, these data are to be taken with caution. But there are other, similar, estimates, including a 2012 report by Goldman and Sachs, where you can read that most recent developments need at least 120 $/barrel to be profitable. Here is a slide from that report.

So, you see that, with the present prices, a good 10% of the oil presently produced is produced at a loss. If prices were to go back to values considered “normal” just 10 years ago, around 40 $/barrel, then we would lose profitability for around half of the world’s production. Production won’t collapse overnight: a good fraction of the cost of production derives from the initial investment in an oil field. So, once the field has been developed, it keeps producing, even though the profits may not repay the investment. But, in the long run, nobody wants to invest in an enterprise at so high risks of loss. Eventually, production must go down: there will still be oil that could be, theoretically, extracted, but that we won’t be able to afford to extract. This is the essence of the concept of depletion.

The standard objection, at this point, is about technology. People say, “yes, but technology will lower costs of extraction and everything will be fine again”. Well, I am afraid that it is not so simple. There are limits to what that technology can do. Let me show you something:

That object you see at the top of the image is a chunk of shale. It is the kind of rock out of which shale oil and shale gas can be extracted. But, as you can imagine, it is not easy. You can’t pump oil out of shales; the oil is there, but it is locked into the rock. To extract it, you must break the rock down into small pieces; fracture it (this is where the term “fracking” comes from). And you see on the right an impression of the kind of equipment it takes. You can be sure that it doesn’t come cheap. And that’s not all: once you start fracking, you have to keep on fracking. The decline rate of a fracking well is very rapid; we are talking about something like a loss of 80% in three years. And that’s expensive, too. Note, by the way, that we are speaking of the cost of production. The market price is another matter and it is perfectly possible for the industry to have to produce at a loss, if they were too enthusiastic about investing in these new resources. It is what’s happening for shale gas in the US; too much enthusiasm on the part of investors has created a problem of overproduction and prices too low to repay the costs of extraction.

So, producing this kind of resources, the so called “new oil” is a complex and expensive task. Surely technology can help reduce costs, but think about that: how exactly can it reduce the energy that it takes to break a rock into fine dust? Are you going to hammer on it with a smartphone? Are you going to share a photo of it on Facebook? Are you going to run it through a 3D printer? The problem is that to break and mill a piece of rock takes energy and this energy has to come from somewhere.

Eventually, the fundamental point is that you have a balance between the energy invested and the energy returned. It takes energy to extract oil, we can say that it takes energy to produce energy. The ratio of the two energies is the “Net Energy Return” of the whole system, also known as EROI or EROEI (energy return of energy invested). Of course, you want this return to be as high as possible, but when you deal with non renewable resources, such as oil, the net energy return declines with time because of depletion. Let me show you some data.

As you see, the net energy return for crude oil (top left) declined from about 100 to around 10 over some 100 years (the value of 100 may be somewhat overestimated, but the trend remains the same). And with lower net energies, you get less and less useful energy from an oil well; as you can see in the image at the lower right. The situation is especially bad for the so called “new oil”, shale oil, biofuels, tar sands, and others. It is expected: these kinds of oil (or anyway combustible liquids) are the most expensive ones and they are being extracted today because we are running out of the cheap kinds. No wonder that prices must increase if production has to continue at the levels we are used to. Then, when the market realizes that prices are too high to be affordable, there is the opposite effect; prices go down to tell producers to stop producing a resource which is too expensive to sell.

So, we have a problem. It is a problem that appears in the form of sudden price jumps; up and down, but which is leading us gradually to a situation in which we won’t be able to produce as much oil as we are used to. The same is true for gas and I think that the present crisis in Europe, which is seen today mainly as a political one, ultimately has its origin in the gradual depletion of gas resources. We still have plenty of gas to produce, but it is becoming an expensive resource.  It is the same for coal, even though so far there we don’t see shortages; for coal, troubles come more from emissions and climate change; and that’s an even more serious problem than depletion. Coal may (perhaps) be considered abundant (or, at least, more abundant than other fossil resources) but it is not a solution to any problem.

In the end, we have problems that cannot be “solved” by trying to continue producing non renewable resources which in the long run are going to become too expensive. It is a physical problem, and cannot be solved by political or financial methods. The only possibility is to switch to resources which don’t suffer of depletion. That is, to renewable resources.

At this point, we should discuss what is the energy return of renewables and compare it to that of fossil fuels. This is a complex story and there is a lot of work being done on that. There are many uncertainties in the estimates, but I think it can be said that the “new renewables“, that is mainly photovoltaics and wind, have energy returns for the production of electrical energy which is comparable to that of the production of the same kind of energy from oil and gas. Maybe renewables still can’t match the return of fossil fuels but, while the energy return of fossil energy keeps declining, the return of renewables is increasing because of economies of scale and technological improvements. So, we are going to reach a crossing point at some moment (maybe we have already reached it) and, even in terms of market prices, the cost of renewable electric power is today already comparable to that of electric power obtained with fossil fuels.

The problem is that our society was built around the availability of cheap fossil fuels. We can’t simply switch to renewables such as photovoltaics, which can’t produce, for instance, liquid fuels for transportation. So, we need a new infrastructure to accommodate the new technologies, and that will be awfully expensive to create. We’ll have to try to do our best, but we cannot expect the energy transition – the “energiewende” – to be painless. On the other hand, if we don’t prepare for it, it will be worse.

So, to return to the subject of this hearing, we were discussing energy security for Europe. I hope I provided some data for you that show how security is ultimately related to supply and that we are having big problems with the supply of fossil energy right now. The problem can only increase in the future because of the gradual depletion of fossil resources. So, we need to think in terms of supplies which are not affected by this problem. As a consequence, it is vital for Europe’s energy security to invest in renewable energy. We shouldn’t expect miracles from renewables, but they will be immensely helpful in the difficult times ahead.

Let me summarize the points I made in this talk:

Thank you very much for your attention and if you want to know more, you can look at my website “Resource Crisis”. www.cassandralegacy.blogspot.com


Ugo Bardi teaches at the University of Florence, Italy. He is a member of the Club of Rome and the author of “Extracted, how the quest for mineral wealth is plundering the planet” (Chelsea Green 2014)





Where is the price of oil heading?

6 10 2014

In the sidebar at right of this blog is a live WTC (West Texas Crude) price chart.  I’ve been watching it intently because WTC has been in the low 90’s for some time, and has actually gone under it as I write.  What is going on?  There is a lot of debate about this all over the internet at the moment too….  is this a ‘sign’ that the October financial heebee jeebies are about to strike, again?

Take a look at this chart (lifted from Nicole Foss’ website)

https://i0.wp.com/www.theautomaticearth.com/wp-content/uploads/2014/10/OilBreakevenPrices.png

Data from Reuters, IEA, Deutsche Bank and Bloomberg

At the current $90 price, not even Saudi Arabia (which has just posted its first deficit) can break even.  So what is causing this collapse in the oil price?

There is much speculation that ‘someone’ wants to punish Putin for his demeanours in the Ukraine, but if this ‘someone’ is American, then they are seriously hurting the shale oil companies there who can’t even make a profit when oil is at $100….  Or is this someone’s way of ensuring, if you can even put it that way, that GFC MkII doesn’t happen…… yet?  Are we seeing short-term trends? Ironically, the current prices – and remember, oil dropped to $40 in 2008 – are set to cause such mayhem in production and investment due to the fact that much has changed in the oil industry since 2008, that prices must go up again no matter what the economy does.  We are seeing the proverbial rock and a hard place today…….

There is also much confusion in the media, as Ilargi explains:

How reliable are OPEC numbers? Are those just the ones members themselves report? Saudi Arabia has a deficit, AND they cut prices, AND they cut production? I can’t say I’ve figured out either the real actions, or the reasons behind them, but that doesn’t make any sense as a stand-alone set of facts. So why do they do it, if they do, if these things are accurate? We’ve yet to find out.

Saudi enjoys some of the lowest production costs, excluding capital expenditure on new projects, in the region of $2 per barrel, giving it a large margin to soak up a sudden drop-off in price. This compares with estimated production costs in the North Sea which are in the region of $50 per barrel, according to Oil & Gas UK figures.

The graph puts Saudi production costs at $90 per barrel, and the Telegraph, which published the graph, puts it at $2? Please explain, guys. Is that $88 per barrel in “capital expenditure on new projects”?

But then again, today’s modern media just copy/paste stuff without ever checking their facts, the people who put articles in these papers are usually totally ignorant of facts.  I was just shown an article in the Cairns Post (Nth Qld) claiming a new solar farm was going to be built near Cooktown, one of the highest rainfall places in Australia, illustrating the story with a solar thermal plant that would only be built in a desert somewhere.  Then adding that this would alleviate post cyclonic blackouts (told you it rains a lot there!) because the solar plant would be more reliable…….  Hello?  Power goes down when the grid goes down from downed power lines, not because power generators are blown away!  FAIL….  Believe nothing you read in mainstream media is my new motto.  But I digress….

Ilargi continues with……:

Fracking has helped the US achieve its highest oil production levels since 1986 over the last two months at a rate of 8.5m bpd. The threat of a full lifting of the ban on exports has also helped the US to drive down the price and potentially cripple the Russian economy. Moscow is largely dependent on crude sales for foreign currency earnings and oil trading at around $80 per barrel for a period of months could bring the country to its knees.

Something tells me that Putin is far more aware of the reality of the shale industry than Americans are. Which is that shale oil has a present, but no future.

[..] if Opec fails to cut production in response to the current trend in falling oil prices then around 9% of US “tight oil” output would be immediately rendered uneconomic at a level of $90 per barrel. This figure would rise to 39% should prices slump as low as $80 per barrel.

Again, I don’t believe this for a second. It may be true is you exclude capital costs, but what if you include them, as in normal accounting, and what happens when interest rates rise, in an industry that’s borrowed itself up to its infinity and beyond?

Cute article, nice try, but in the end it leaves far too many questions.

Yep……  oil’s future is in serious doubt if these shennanigans continue, and as a result, so will the future of renewables.

Watch this space.





America: You’ve got three more years to drive normally! – Part 2

5 10 2014

Part 1 of this series stirred up a lot of interest with Rag Blog readers, and it was reposted by Resilience.org where it was also popular. I imagine the article’s somewhat alarming title struck a nerve, calling attention to the repressed fears that challenge our suburban, car-centric American culture. Fears that stem from our culture of denial in response to business as usual.

In Part 2 we will further explore the constraints on our energy resources and will look at the role of finance capital in perpetuating our denial; denial that inhibits energy reform until there is a full blown crisis.

                                                                                                                                                                                                                                                                                                Below are clickable section heads for those of you who like to jump around.
The context of our driving problem
As a nation we know that something is deeply wrong, starting with a politically gridlocked congress. The recent march against climate change underlined this high level of public concern.
Arguably the top issue of our times has become how long our physically expansive system of global finance capital can maintain profitable growth without wrecking the global environment. In this respect, public attention to global warming has become the leading example.
Business as usual justifies its legitimacy by maintaining that at least some plausibly improved version of our system can pay off its immense deficit of public and private debt by growing profitably forever. And can do so in a finite world that is clearly already struggling to deal with a human population of 7 billion. There is now a wealth of solid scientific research and useful information that shows that this goal is impossible; information easily available from a growing assortment of environmental awareness sites like the Post Carbon Institute.
Expansionist economic control and free market fundamentalism have become like a state religion.
Expansionist economic control and free market fundamentalism have become like a state religion uniting politics and economics in support of corporate domination. In accord with this point of view, it comes as no surprise to see Paul Krugman, a liberal Keynesian advocate of a gentler greener kind of capitalist economics, blame the Post Carbon Institute for teaching about natural limits to economic growth.
This recent exchange features Krugman as an economic expansionist, and Richard Heinberg, in response, laying out conflicting positions on the growth issue.  Nobel economics prize winner Krugman seems to have blundered into an uphill debate against top scientists and their intellectual allies.
Now, with the help of recent geological data, we can see that peak oil will probably soon limit and affect an important aspect of American life, namely our driving. The global oil supply situation will probably only permit about three more years of easily affordable driving. So far we have been able mostly to ignore this problem, which has been nipping at our heels for most of the past decade by more than tripling oil prices.
Follow the oil
Oil, when burned, has the unique ability to supply the motive muscle power needed throughout our global civilization. The power to move stuff around; to physically expand global trade by powering nearly all the world’s ships, planes, trucks, and trains. The Hirsch report laid out the difficulty of an economic transition away from oil about a decade ago, by predicting the need for about 20 years to properly prepare for peak oil. Everyone has become fond of solar panels these days, but there has not been nearly enough progress towards alternatives since conventional oil peaked in 2005, given the true scale of the problem.
Peak oil is here, or close enough for us to be able to sketch out important details.
Peak oil is here, or close enough for us to be able to sketch out important details. The current world oil glut is genuine, and we need to try to see why this situation is actually quite compatible with a globally peaking oil supply. We can closely examine the considerable body of evidence that suggests about three more years of easy driving. Anyone can study the same evidence and attempt a more optimistic interpretation.
Thanks to what could be seen as the increasingly disruptive side effects of maintaining our globally oil-dependent economy, we face unpredictable problems that could interfere with normal driving even sooner than three years.
Having made a horrible mess of Iraq, we now see rising conflict throughout the Middle East, largely as a result of an old agreement with the Saudis after the 1970s energy crisis. An agreement to maintain through military force the stable production and export of OPEC oil on the world marketplace. A second looming threat stems from the fact that the global economy was thoroughly disrupted by a severe oil price spike in 2008 and has not recovered. The world of finance capital has been kept solvent since then through transfusions of publicly funded credit, such as quantitative easing and low interest rates.
It is no accident that we sometimes call our dollars petrodollars. The British pound may have been backed by gold, but now our dollar is backed by its singular ability to buy oil and its combustion-derived mobile power on the global market. Oil is only globally traded in dollars, which are also the world’s standard reserve currency.
Our dollar-based global economy, led by finance capital centered in Wall Street and London, has managed to function successfully since WWII, but, distressingly, it is beginning to  resemble an oil-addictive dollar-based global Ponzi scheme, sure to fail without an exponential growth in profit.”
Fracking looks like a fossil fuel retirement party
The technical advance that is keeping the USA driving affordably, for now at least, is hydrofracturing or fracking, used to produce tight gas and oil from shale deposits. This U.S. fracking boom is now adding more than 3 million barrels of tight oil and closely associated liquid condensate fuel each day. This is enough new product that, when it is added to the world’s slowly declining conventional oil production, the resulting in obscuring and delaying the onset of the peak oil problem, if only for a few years.
For the moment, there is a global oil glut and a falling price due to an unusually weak global customer demand for the relatively constant stream of oil being produced and consumed globally, but that does not mean that this product is being produced at a profit. Over the short run, shifting consumer demand due to the economy or freezing weather conditions can have a much bigger faster effect on price than investment in new production, which is slow, and risky at best.
As a whole, domestic oil and gas from fracking is beginning to look like an investment bubble.
As a whole, domestic oil and gas from fracking is beginning to look like an investment bubble. U.S. production of tight oil by fracking can probably only increase and postpone another global oil price spike for a few years. Even if the current fracking boom should somehow give us five more years, it doesn’t change the picture much. Driving will get less affordable because of fuel, and there will be a painfully short amount of time to prepare. Gasoline-powered cars are expensive and last for more than a decade, and the USA doesn’t have any good mobility alternative to serve its suburbs.
An oil glut for now
As we saw in Part 1, trying to convince the U.S. public that they might have a problem driving about three years from now is going to be a hard sell. Who is the driving public to believe, those who warn them about a problem a years from now, or their own eyes? This is especially true since anyone who fills up at the gas pump can see for themselves that gasoline has been getting a bit cheaper lately.
For now, oil and its products remain a buyer’s market. Here we see the Wall Street Journal telling us that the reason that gas prices are going down is because of a glut of gasoline.
A global glut of crude oil is the main driver behind the decline in gasoline prices. Relatively cheap oil has made it more profitable for refiners to produce gasoline and other fuels, and they have ramped up production to record levels. This boom in supplies has sent gasoline prices tumbling. Traders and other market observers expect the flow of both crude oil and gasoline to keep rising, likely exerting more downward pressure on prices.
We are now at the doorstep of globally peaking oil
When I say that Americans will probably have trouble driving in only three years, this means that I think another oil price shock causing widespread public driving anxiety is quite likely by then. It could be less than three years; James Howard Kunstler gives us two years for reasons similar to mine.
Wait until they discover that the shale oil producers have never made a buck producing shale oil, only on the sale of leases and real estate to “greater fools” and creaming off the froth of the complex junk financing deals behind their exertions. Expect that mirage to dissipate in the next 24 months, perhaps sooner if the price of oil keeps sinking toward the sub $90-a-barrel level, where there’s no economically rational reason to bother drilling and fracking.
Gasoline is cheap for now only because oil production is relatively constant and the oil must be sold at whatever price the global market can bear, even during a time of global deflation due to the lingering effect of the 2008 oil price shock.
The estimate of three more years of easily affordable driving is an educated guess, based on looking at the work of a number of expert forecasters and analysts who predict that the global oil market will run out of profitable U.S. fracking plays in about this time. After another oil price spike we’re back to a bad recession like 2009, but this time with even less of the oil needed to recover.
The price of oil has a complex and partly hidden effect on the economy.
The price of oil has a complex and partly hidden effect on the economy. Since cheap conventional oil globally peaked in 2005, the higher price of fuel has acted like a slowly increasing but hidden tax on almost everything sold, since almost everything sold has some rising oil price costs embedded in its sales price. People cut back on discretionary spending in order to pay more for gas, which sent those sectors into recession. A hidden oil tax tends in this way to cause the pervasive economic stagnation we now see.
A rapid oil price spike is a much more politically visible target than the general stagnation effect of high energy prices, since an oil price spike leads to higher fuel and food costs fairly quickly. These two impacts of high oil prices, one faster and one slower, generate different types of political and economic responses.
Without an economic recovery, which is itself unlikely without cheap oil, another gasoline price spike to even $4 dollars a gallon might now cause a broad and angry public demand for Congress to do something fast, a sort of a political tipping point. A return to gasoline rationing, like that used after the 1973 oil crisis, is one plausible way for politicians to try to ease the public’s driving pain.
Expert evidence for three more years of easily affordable driving
The estimate of three years of easily affordable driving depends primarily on estimating how long the current fracking boom, which is now holding down the global oil price, can be sustained. There seems to be almost a consensus, outside of government officialdom like the EIA, of maybe two or three more years.

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Post Carbon Institute fellow and author Richard Heinberg has written an exceptionally well-researched book, published in July 2013, titledSnake Oil: How Fracking’s False Promise of Plenty Imperils our Future.
In this interview, Heinberg reviews our energy situation; you can get a good idea where things stand just by listening to about the first 10 minutes.  Following is a quote from Heinberg’s recent writing: “Why Peak Oil Refuses to Die. ”
Let’s start with the common assertion that oil supplies are sufficiently abundant so that a peak in production is many years or decades away. Everyone agrees that planet Earth still holds plenty of petroleum or petroleum-like resources: that’s the kernel of truth at the heart of most attempted peak-oil debunkery. However, extracting and delivering those resources at an affordable price is becoming a bigger challenge year by year. For the oil industry, costs of production have rocketed; they’re currently soaring at a rate of about 10 percent annually. Producers need very high oil prices to justify going after the resources that remain—tight oil from source rocks, Arctic oil, ultra-deepwater oil, and bitumen. But oil prices have already risen to the point where many users of petroleum just can’t afford to pay more. The US economy has a habit of responding to oil price hikes by swooning into recession, and during the shift from $20 per barrel oil to $100 per barrel oil (which occurred between 2002 and 2011), the economies of most industrialized countries began to shudder and stall. What would be their response to a sustained oil price of $150 or $200? We may never know: it remains to be seen whether the world can afford to pay what will be required for oil producers to continue wresting liquid hydrocarbons from the ground at current rates.
Heinberg’s shale oil book is partly based on the work of a top Canadian resource geologist, David Hughes, who did a study of tight oil and gas economics for the Post Carbon Institute, titled “Drill Baby Drill.” The report can be downloaded here. Basically what Hughes says is that there are only a few geographically large shale plays which contain within themselves much smaller sweet spots, those areas which are profitable when used to produce fairly high priced oil or gas. But these fracking wells tend to deplete rapidly, and the truly profitable sweet spots are being used up fast, implying that U.S. shale oil production will peak about 2017.
Hughes explained that more than 80 percent of the nation’s shale oil comes from just two plays, the Bakken field in North Dakota and Montana and the Eagle Ford in Texas. He estimates that production in those regions will recede back to 2012 levels in 2019. Overall production across the nation’s shale oil fields will peak in 2017.
Readers who want to review and keep abreast of the evidence should become familiar with the peak oil blogs.
Readers who want to review and keep abreast of the evidence should become familiar with the peak oil blogs. Ron Patterson posts on Peak oil barrel.  Crude Oil Peak  is another excellent source  Yet another is Peak Oil News.
In this article — “US shale oil growth covers up production drop in rest-of-world” — we see charts that tell us that that an increase in U.S. shale oil production is now the one factor that has kept otherwise declining global oil production increasing.  Tight oil has been effectively obscuring the pricing signals that peaking oil in the rest of the world would give, as global oil need, if not ability to buy, continues to rise.
Here is what a top Saudi geologist, now in private practice as a consultant, had to offer in an interview with ASPO-USA earlier this year (“Ex-Saudi Aramco geologist Dr Husseini predicts oil price spikes of USD 140 by 2016-17: graphs”)
Husseini: My base oil price forecast in 2012 dollars still ranges between $105 and $120/barrel Brent with a volatility floor of $ 95/barrel and more probable upward spiking to $140/barrel within 2016/2017.
Dr. Husseini didn’t say how he predicted the oil price spike, but Crude oil Peak analyst Matt Mushalik comments on the Husseini interview. The last graphic predicts that rising demand will meet the falling production predicted by Dr. Husseini about 2016, and concludes as follows:
We see that the intersection point is somewhere in 2016. What is more important than the precise year in which the next oil crunch may happen is the widening gap in the 2nd half of this decade.
Conclusion: Whether the world wants to follow the New Policies Scenario of the IEA WEO 2013 is another question altogether. It seems governments are rather on a current policies track which increases oil demand and therefore pressure on oil prices.
Here is a graphic that illustrates what might happen when fracking declines. See Figure 1.  The red region representing tight oil is the only thing that has kept total world oil production from having already peaked. This is evidence that only a continuation or increase in the current level of U.S. tight oil production from shale can prevent another oil price spike followed by an economic bust.
The Medium Term Oil Market Report of the International Energy Agency (IEA, Paris), published in June 2014, contains a graph which implies that US crude production will start to peak in 2016. Few took notice although the world is continuously occupied with oil and energy related conflicts and wars in Ukraine, Libya and Iraq. So far, oil prices increased only shortly when fights flared up. Apparently oil markets are at ease while the US tight oil “revolution” is underway. But for how long?
The graph [Fig 1: US tight oil and crude oil in rest of world vs oil prices] shows that US tight (shale) oil sits on top of a bumpy crude production plateau in the rest of the world which clearly started in 2005 (average of 73.4 mb/d since Jan 2005). Despite increasing tight oil production oil prices did not go down but stayed at a level of around US$ 100 a barrel. We can safely say that without US tight oil – in May 2014 around 2.9 mb/d – the world would be in a deep oil crisis. People got accustomed to a higher oil consumption level which will be hard to come down from. Between 2005 and 2007, oil production declined by around 2 mb/d (supply shock) and oil prices doubled. That gives us an idea what will happen when tight oil starts to decline. So it is important to know when tight oil reaches its tipping point.
Another prediction that tight oil from fracking will top out in its domestic production in only about three years comes from the U.S. federal government, via the Energy Information Agency (EIA) and its periodic Outlook report.

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See how much difference a year can make in the “reference case” or business as usual expectations, about doubling the expected future output. However if fracking expectations can double in a single year, how accurate is the EIA tight oil production model? How sensitive is the model to oil price? Why not show the model and also show the expected tight oil output for a high, medium, and low oil price? If our future driving affordability is tied to this oil output, we deserve good data transparency.
Here is how top oil analyst Tom Whipple of ASPO-USA reviewing the tight oil production situation recently put it.
The two major forecasting agencies, Washington’s EIA and Paris’ IEA, are both more pessimistic than is generally known for they both foresee US shale oil production levelling off as soon as 2016. The reason for this is that drillers will simply run out of new places to drill and frack new wells. While new techniques of extracting more oil from a well are possible, there is need to look closely at the costs of these techniques vs. the potential payoff.
The shale oil situation in Texas is somewhat different than in North Dakota, for there you have much better weather and two separate shale oil deposits. The recent growth in Texas’s shale oil production has been much smoother than in storm-prone North Dakota and has been increasing at about 44,000 b/d each month. So far as can be seen from the outside of the industry, production in both states will continue to grow for at least another year or two — but then we will be at 2016.
The government has never gotten around to publishing the assumptions that go into the forecast that U.S. shale oil production will stop growing circa 2016. The biggest difference between EIA/IEA and independent analysts is the government forecasters do not see a precipitous drop in shale oil production following the peak. Instead they see a period of flat production followed by a gentle decline stretching well into the next decade. Such a gentle end to the shale oil “bubble” can only assuage fears of a calamity. This projection on a gentle end to U.S. shale oil is at variance with outside forecasters who note that shale oil wells are pretty well gone in three years and simply do not see where the oil to maintain production levels will be coming from for another 10 or 15 years after the peak…
Independent analyses of U.S. shale oil generally come to the same conclusion that production will peak in the 2016-2017 time frame, but as noted above see a much faster decline than does the government.
Hydrofracturing for tight oil and gas is now about all that is left to maintain global oil production
Hydrofracturing for tight oil and gas is now about all that is left to maintain global oil production, as Art Berman points out in this interview: “Shale, the Last Oil and Gas Train”
Oil companies have to make a big deal about shale plays because that is all that is left in the world. Let’s face it: these are truly awful reservoir rocks and that is why we waited until all more attractive opportunities were exhausted before developing them. It is completely unreasonable to expect better performance from bad reservoirs than from better reservoirs. The majors have shown that they cannot replace reserves. They talk about return on capital employed (ROCE) these days instead of reserve replacement and production growth because there is nothing to talk about there. Shale plays are part of the ROCE story–shale wells can be drilled and brought on production fairly quickly and this masks or smooths out the non-productive capital languishing in big projects around the world like Kashagan and Gorgon, which are going sideways whilst eating up billions of dollars. None of this is meant to be negative. I’m all for shale plays but let’s be honest about things, after all! Production from shale is not a revolution; it’s a retirement party. [emphasis mine]
Finally, lets conclude this section with a peak shale oil prediction for 2016 made by one of the most skillful resource data analysts, Jean Laherrere, who along with Colin Campbell coauthored “The End of Cheap Oil” in Scientific American in 1998, when oil cost less than $20 a barrel.  Scroll toward the end of the link and see a big green hump in a chart that represents the official EIA Outlook prediction of a peak in shale oil in 2017. Laherrere’s peak for shale oil is followed by a much steeper decline rate as can be seen in the subsequent chart.

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As Laherrere says:
It seems that most oil companies are spending more than their revenues by increasing their debts. Countries can live for a long time with huge debt increase, not companies. They count on the stock market by delivering optimistic reports and keep drilling to avoid the production to decline. With shale oil or shale play, in contrary with conventional where wells are dry or producing, oil can be produced even for a while if not economical.
Such behaviour explains why most peak forecasts are wrong. But the main question is about the slope of the decline after the peak. EIA forecast a LTO (light tight oil = shale oil) peak in 2017 it is not too far after my forecast, the big difference is the slow EIA LTO decline.
Why fuel prices probably won’t fall much more
Why won’t the price of driving, as affected by fuel cost, go down very much or for very long? The Saudis alone can produce about 10 million barrels of oil a day mostly for export. This gives the Saudis the ability, acting as one country with a centralized oil production policy, to put a floor under the global oil price simply by cutting back on their oil offered for export. Abundant Saudi oil exports remain vital to a world of commerce built with and quite dependent on affordable oil.
The Saudis lack the excess oil production capacity that they once had, so they cannot flood the market to lower the oil price.
The Saudis lack the excess oil production capacity that they once had, so they cannot flood the market to lower the oil price. However the Saudis still have the critical market power, through cutting production, to keep global crude oil prices from sinking.
“We are swimming in crude, and they [the Saudis] know that better than anyone because they are the biggest exporter,” Mike Wittner, the head of oil market research at Societe Generale in New York, said by phone Sept. 9. “History shows that the Saudis will just do what’s necessary.” … Saudi Arabia made the biggest contribution to OPEC’s production cuts in 2008 and 2009 as demand contracted amid the financial crisis. The group took almost 5 million barrels of daily output off the market, reviving prices from about $30 at the end of 2008 to almost $80 a year later.
At its current price, “Brent has traded since early July within the range of $95 to $110 described as ‘fair’ by Saudi Oil Minister Ali Al-Naimi at a meeting of the Organization of Petroleum Exporting Countries in June.”
The Saudis have an incentive to pump at or near their maximum capacity, but to cut back when the global price sinks below their favored price range, neither so high as to hurt the global economy, nor so low that it puts other higher cost oil producers, which together supply most of the world’s other oil, out of business.
Both Saudi and Iran recently warned that declines in crude prices will be short lived. It is an ominous sign for motorists in the UK who were hoping that recent declines in the cost of a gallon of petrol would be sustained.
The Saudi’s favorable price band is shrinking and may not even exist any more because global oil customers are getting poorer, even while oil producers, especially private oil investors outside the Middle East, are losing money by producing oil under increasingly costly and difficult circumstances.
A timeless pattern of periodic energy investment overshoot
The human effort required to obtain and channel the energy needed to build and maintain an economy is a key feature of all civilizations, which ultimately limits their complexity and type of economic organization, as Tainter has pointed out.  For this reason, changes in the supply and cost of motive power, whether this is derived from oxen and slaves consuming grain or from diesel engines burning oil, can cause civilizations to rise and fall and to win or lose wars.
The oil industry has always been characterized by boom and bust investment cycles.
As a primary and vital source of such power, the oil industry has always been characterized by boom and bust investment cycles, a pattern of exuberant investment in production followed by ruinous periodic production gluts. Frenzied oil production in the giant East Texas field during the early depression years caused the oil price to fall as low as 13 cents a barrel. The Texas governor called out the Texas Rangers to halt and regulate excessive production, which was permanently damaging oil fields.
Later regulation from the Texas Railroad Commission established allowable oil production limits that effectively set world oil prices from the 1930s until the 1960s. This Texas regulation of private producers later served as the regulation model for OPEC, created to prevent ruinous price volatility in the unregulated global oil market.
In Part 1, we saw the federal data compiled by the EIA, which indicates that not only are the top 127 energy companies losing money on oil and gas, but that meanwhile most OPEC oil producing countries are also having trouble meeting their costs by selling oil to a depressed global market.
Deep water oil production in the Gulf of Mexico was expanding fairly rapidly until recently. Since deep water oil is very expensive and risky — and not very profitable — production by the private majors like Exxon, those who can afford $180 million for a deep water well, have been shifting back onshore with the advent of fracking, which is more predictable in outcome and might only cost $8 million per well. Nobody would be doing deep water drilling in the Gulf of Mexico if there were profitable places left to drill on dry land, but now even the deep water drilling has tapered off.
“Deepwater is providing lower returns and has shown no production growth while U.S. unconventionals have much higher returns (at least on paper), [and] enough scale of reserves to be of interest to the majors … so according to them, they will shift spending,” Wicklund noted.
With current economic uncertainty, investors don’t know what the price of oil will be a few years into the life of the well. Until about 2012, the global price of oil was rising nicely, comfortably over $100 a barrel, but over the last two years it has been almost flat and is now decreasing due to a stagnant or deflating global economy.
But oil producers are tied to the existing market price, for better or worse. The market demand for oil-based fuel can rise or fall much faster than the supply tends to change. A low rate of drilling sets the stage for a future price rise when the return of a tight market causes global oil prices to rise again.
Since fracking is what is has been holding U.S. driving costs down, it stands to reason that when this rapidly depleting oil source goes into decline, fuel prices will rise and we will be obliged to drive less.
Military events which could seriously interfere with driving in less than three years
There are looming but plausible threats to widely affordable American driving that are widely understood to exist but are nearly impossible to accurately predict in their severity and timing. Two major “black swan” events are first, an interruption in steady oil exports from the Middle East, and second, a swiftly developing global economic crisis which could affect the U.S. and global economies.
Our current effort to militarily contain the Sunni-based Islamic State in Iraq and deescalate regional conflict is plagued with uncertainties, if not impossibilities. Nobody can easily anticipate how military turmoil in the Sunni regions to the north might affect oil production from the Shiite dominated oil-producing regions of Iraq to the south, which are currently producing and exporting about 3 million barrels of oil a day.
Trying to use U.S. military power to keep the Middle East reliably producing its oil for export has become a daunting military juggling act.
There is much to go wrong in a conflict that could spill over into nearby Saudi Arabia, which is itself increasingly unstable. Trying to use U.S. military power to keep the Middle East reliably producing its oil for export has become a daunting military juggling act.  The new Prime minister of Iraq tells us that all foreign troops will be unwelcome at the same time our generals tell us that the conflict cannot be won from the air.
In light of this situation, we might be better off using diplomacy rather than relying on military power to achieve our goals.
Economic events which could seriously interfere with driving in less than three years
Gasoline has gotten a little cheaper at the pump lately, headed toward $3 a gallon, which has the welcome effect of stimulating the U.S. economy by putting some extra dollars in the pockets of most drivers. But it doesn’t change the big picture much.
The USA remains in an economic crisis because of low growth, a dependence on easy money from the Fed, and an inability to revive the U.S. economy despite a massive level of quantitative easing.

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It is hard not to see that the easy credit and low interest rates are tied to the new public debt shown in Figure 5, and that this cash is seeking out stocks. It looks like the Fed’s quantitative easing is inflating stock prices, which are soaring, but that this cash is avoiding investment in the stagnating economy of high unemployment and minimum wage jobs familiar to those who don’t own stocks. The Nasdaq composite index looks even more peaky. Looking like an asset bubble in search of profitable investment in the self-promoting world of finance, rather than in the struggling hard times economy unable to keep growing without cheap oil. How high will the latest shark tooth get before it falls again?
It is is not widely understood that the great recession of 2008 was initiated when oil surged to $147 a barrel in mid-year, followed by a banking liquidity paralysis and a steep oil price collapse. This same event also tells us roughly what to expect when the current oil glut is succeeded by another oil price spike. Dr James Hamilton has done a lot of economic analysis that strongly links oil price rises to subsequent recessions.
The USA is slowly moving in the right direction, burning less oil and we are driving less than ever, but the easy progress has already been made. We still have to import roughly the same amount of oil that we produce domestically just to keep driving normally. There is essentially one big global oil market which has Americans bidding against the Chinese and everyone else for fuel, in the context of a shrinking supply of globally traded oil.
The Chinese economy now seems to be headed into its own growth slump.
The Chinese economy now seems to be headed into its own growth slump.  For a decade or more, investments in many sorts of raw materials, including oil, have depended on strong Chinese demand that acted as an economic engine to maintain global trade and support rising commodity prices.
…In other words, we are now in a world in which the biggest economy, Europe, is about to enter a triple-dip recession, and the third largest standalone economy, China, is undergoing an economic standstill, and all hopes and prayers are that China will join the ECB in activating monetary easing once again. But yes, the Fed will not only conclude QE but will supposedly begin rising rates in just over two quarters. Good luck with that.
With a global economy depressed for years by the stress of about $100 a barrel oil prices, and with attempts to revive the US. economic growth ineffective, aside from what looks like a stock bubble, we could easily slip into a global deflationary spiral. It is not apparent that the global economy can grow at all without cheap oil. As a result, we have a world flush with dollars that have a very low velocity of circulation and a cautious deflationary spending psychology prevails.
Richard Heinberg’s book The End of Growth pointed out that, with the end of cheap oil, the global economy is likely to be incapable of real material growth, as opposed to financial sector growth.  Good economists are starting to realize that the future doesn’t work very well without cheap oil.
Peak oil could be the catalyst for global collapse. Some see new fossil fuel sources like shale oil, tar sands and coal seam gas as saviours, but the issue is how fast these resources can be extracted, for how long, and at what cost. If they soak up too much capital to extract the fallout would be widespread.
Gail Tverberg in her excellent blog Our Finite World, thinks global deflation is happening now. (“Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?”)
I would argue that falling commodity prices are bad news. It likely means that the debt bubble which has been holding up the world economy for a very long time — since World War II, at least — is failing to expand sufficiently. If the debt bubble collapses, we will be in huge difficulty…
Tom Whipple, who we saw comment earlier, points out that social and economic problems related to peak oil are already global, and are around us everywhere whether or not we are able to understand the connections.
If we step back and acknowledge that the shale oil phenomenon will be over in a couple of years and that oil production is dropping in the rest of the world, then we have to expect that the remainder of the peak oil story will play out shortly. The impact of shrinking global oil production, which has been on hold for nearly a decade, will appear. Prices will go much higher, this time with lowered expectations that more oil will be produced as prices go higher. The great recession, which has never really gone away for most, will return with renewed vigour and all that it implies…
All this is telling us that the peak oil crisis we have been watching for the last ten years has not gone away, but is turning out to be a more prolonged event than previous believed. Many do not believe that peak oil is really happening as they read daily of surging oil production and falling oil prices. Rarely do they hear that another shoe has yet to drop and that much worse in terms of oil shortages, higher prices and interrupted economic growth is just ahead. We are sitting in the eye of the peak oil crisis and few recognize it. Five years from now, it should be apparent to all.




America: You’ve got three more years to drive normally!

5 10 2014

Part 1

Three more years? That’s pretty scary! Surely there must be a mistake in that headline.

Is it possible that average Americans could have a hard time driving only three years from now? Preposterous, to say the very least! Three more years to drive would be awful scary if it were true. Fortunately, it can’t be true because the USA has been racing ahead, drilling like crazy, with the result that we are now the world’s third biggest oil producer, just behind Russia and Saudi Arabia.

As everyone who follows the news has heard by now, an innovative drilling technology called “fracking” has added about three million barrels a day of new “tight oil” production, from areas of the U.S. like the Bakken in North Dakota, and the Eagle Ford shale in Texas. Obama used to tell us how we need to break our petroleum addiction, but now he can’t bless new drilling enough. As a result, Americans are feeling better and driving more.

Case closed, right? Actually no.

The problem in a nutshell

This article will review the major problem the USA faces and the basic reasons why average American middle class folks can’t keep driving the way they have been accustomed to thinking is their birthright for almost the past century.

This first part begins a series that is partly concerned with geology, partly with the economics of energy, and partly with how the powers of self-interest and denial have blinded Americans to the precarious future of our national fossil fuel addiction.

The economic and geological evidence strongly suggests that the widely acclaimed new “fracking” technology may have bought us a few more years of grace in being able to keep on driving, but that this is about to end. With the end of cheap energy, and cheap oil in particular, the whole world is now facing an end to several centuries of rapid growth based on burning fossil fuels, as we progressed from burning wood to coal, and finally to oil and natural gas. The end of cheap oil means that the USA must now learn to accept a painful new transportation reality.

It all has to do with a peak in world oil production, about which I have written in the past. Shell geologist M. King Hubbert famously predicted in 1956 that U.S. oil production would peak about 1970, which it did, and then globally about 2000. As it happened, he was only off by about five years. Production of conventional oil — meaning cheap traditional oil — peaked globally in 2005.

Now the world is only able to expand global liquid fuel production by producing various costlier unconventional fuels.

Now the world is only able to expand global liquid fuel production by producing various costlier unconventional fuels. We are still mostly able to drive largely because of a big increase in unconventional oil production from sources such as the Canadian tar sands, heavy oil production, and deep water drilling. Especially in the last five years, the widespread use of “fracking,” or the hydrofracturing of petroleum source rock, has been used to yield “tight oil,” as well as natural gas.

Fracking has already added U.S. production of about 3 million barrels per day of expensive, low quality tight “oil,” and this addition is still increasing. This has been enough to allow most people to keep driving for now, although at a much higher fuel cost than people were used to paying a decade ago. In the last decade oil prices have roughly tripled. Only the recent tight oil from U.S. fracking has kept total world liquid fuel production rising.

New oil production already costs more than consumers can pay

The important new information to report is that we can now see the timing of a peak in global oil production much more clearly than even five years ago. Fracking has brought us a little slack in driving, but not much. As we can see, total U.S. driving has been in decline since about 2007, largely due to a rising fuel cost. A decline is total miles driven implies an even sharper decline in per capita driving, as indicated by the red line.

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Chart from State Smart Transportation Initiative.
CLICK ON IMAGE TO ENLARGE.

Fracking production has temporarily held down driving costs, and has thus bought us a few more years of energy crisis denial; for now, driving is expensive but commonly affordable (our global warming denial can still go on for a little longer).

However, driving as usual will probably have to end with the end of the current fracking boom, as soon as its mounting profit losses kill new investment in production. The reason we can’t frack our way out of our oil addiction is that fracking really doesn’t pay off very well. The drilling costs are high compared to conventional oil production, since fracking involves a lot of lateral drilling, plus the great additional energy expense of breaking up a lot of underground rock using high pressure water.

You can produce oil at about $100 a barrel this way, but this tight oil commonly contains a lot of volatile but less valuable condensates like butane. Fracking wells also tend to mostly deplete in just a few years, much faster than old-fashioned conventional oil wells. Although the best fracking wells can still be profitable, the most profitable parts of the major U.S. fracking fields have already been drilled and produced since the low hanging fruit always gets picked first.

Today most energy companies are actually losing money on their oil and gas production.

Today most energy companies are actually losing money on their oil and gas production. This lack of profit, even at the current high price of $100 per barrel, is the way that the world of energy investment tells us that we are reaching peak oil. Peak oil is not exactly geological, although geology has a whole lot to do with it. Peak oil is actually reached when people can no longer afford what it costs to to produce it.

The official U.S. Energy Information Administration recently released a chart which shows that the top 127 oil and gas companies are currently losing money.

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Chart from U.S. Dept. of Energy.
CLICK ON IMAGE TO ENLARGE.

The gap between the cost of producing oil and what our depressed global economy can bear is currently estimated to be about $10 a barrel in losses. This in itself is unsustainable but Gail Tverberg, a very perceptive non-governmental energy analyst, predicts that that this loss on new oil production will widen very rapidly to about $50 per barrel in only a few years, see Fig. 13 at this link.

When the profit on new oil production disappears, the slow depletion of the giant existing fields takes over. The world’s reserves of cheap conventional oil, largely still in the Middle East, are still profitable, but these massive reserves are in slow decline. Russia recently announced that its production has peaked and even the Saudis are suspected to have run out of spare production capacity.

Most people probably think that OPEC must be getting rich on its oil, but the reality is that “Oil prices are now too low for most OPEC countries to cover their spending needs.” Peak oil is sneaky because it has the hidden effect of slowly impoverishing oil customers by inhibiting economic growth in addition to directly raising fuel costs.

The bottom line

We have already reached the point that the average cost to drill for oil is more than our world of oil-starved and economically struggling customers can afford to pay. This is particularly the case when this increasingly costly fuel is used to power gas guzzlers that many people in the USA use to drive to work while earning minimum wage.

We have already seen the price of oil spike to $147 dollars a barrel in 2008, followed by a price collapse that brought the price back down to the low forties a barrel, at least briefly in 2009. This extreme price volatility is by itself enough to scare away a lot of new drilling investment. Once you drill and frack a tight oil well, you must find a market for this expensive oil, even though the price might go down because of a weak economy. Now that most oil companies are losing money, even at $100 a barrel (at this time, global benchmark Brent is trading below $100), we can’t expect this production to increase.

No matter how the relative value of the dollar fluctuates, the amount of oil-based fuel that it can buy will almost certainly have to decrease as a trend.

No matter how the relative value of the dollar fluctuates, the amount of oil-based fuel that it can buy will almost certainly have to decrease as a trend, or perhaps more abruptly due to economic pressure that can be attributed to costly fuel. We are in a real bind when the global economy can’t recover without cheap oil, when at the same time the oil that global trade relies on for its recovery is no longer profitable to produce.

Looking ahead, oil is much more valuable as a feedstock for making petrochemicals than it is for powering inefficient cars. This means that the petrochemical industry will still be bidding a high price for the world’s last oil, long after our gasoline-powered cars go the way of the horse and buggy.





The Crash Ratchets Up…..

13 07 2014

It’s often been said among Peakniks that ‘the crash’ is not an event that will occur smoothly or suddenly, but rather in steps… so a sudden downturn like what happened when the GFC first hit would hit a low, followed by perhaps another rise at best, or a plateau.  Then another sharp downturn would shape the next step down to an even lower plateau.  How long these plateaus last of course is anyone’s guess, and they are at the mercy of events.  Who can guess what might happen in the Middle East next?

Just such a downturn may now not be far away.

Bank lending, it seems, has been setting new records since mid-2013, especially in the USA.  If the last credit bubble – when too many dodgy loans were made by overenthusiastic loan officers before it all blew up in 2008 – was spectacular, this one is even more so….. Based on the loose principle that the US economy can only grow if bank lending balloons, it appears that the lowering ERoEI of the oil industry may be at its core.

This is what the auspicious chart of core bank loans outstanding looks like (via OtterWood Capital Management):

https://i0.wp.com/wolfstreet.com/wp-content/uploads/2014/07/US-Core-bank_loans.png

This time around, economists have been using the borrowing binge as proof that investment was suddenly picking up, that these investments would filter into economic growth, and that after all this time of mirages and sour disappointments, the ever elusive “escape velocity” would finally come……..

It turns out that that jump in investment – powered by bank lending, investment is a code word for debt – that economists have so enthusiastically shown as ‘proof of return to normal’ has been nothing but an illusion. And no, it wasn’t some blogger spouting off pessimistic data, but the Financial Times, quoting such sources as “senior executives” inside major US banks who “are privately warning” that this new lending binge “should not be seen as evidence of an economic recovery.”

Instead, much of the borrowed money was used “to fund payouts to shareholders” via dividends (remember Shell..?) and stock buybacks and to “finance acquisitions,” the source said.  None of these activities are productive, in fact, these acquisitions lead companies to boast about synergies and labour efficiencies – that is, redundencies – at either end, as these businesses get consolidated.

And here’s the sting……  Part of that borrowed money is being ploughed into the American fracking boom where drillers on the terrible treadmill that fracking really is have to contend with terribly sharp depletion rates, forcing them to drill ever more wells just to maintain production.  And they can never get off that treadmill because production would soon collapse if they did, and with each new well they have to borrow more, and then they require more production just to service the ballooning debt.  Revenues have risen 5.6% over the last four years while debt that drillers have piled on has nearly doubled [read… The Fracking Shakeout].

Watch this space, things might get awfully interesting soon…… because as soon as Peak Fracking hits, and that is bound to happen before 2020, all hell will break loose.