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Don’t Fall for the Shale Boom Hype – Chris Martenson Interview

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By James Stafford, editor of Oil Price of Oil Price. Cross posted from Oil Price

We are in the midst of an amazing energy boom, but by sweeping the idea of peak oil under the rug we are ignoring a significant fact: the relationship between hydrocarbon reserves and flow rates are not the same as they used to be—reserves have increased but flow rates are not as high or sustainable.

Perhaps the most important thing we need to pay attention to is net energy returns, on which we run society. Massive new discoveries are only netting a fraction of the returns compared to earlier decades.

While we must proceed into the energy future with caution—and the knowledge that analysts may be overselling the shale boom—there are also, as always, major opportunities in this story and they can be found in the wider trends related to improving energy efficiency.

Looking at our energy future in more detail we were fortunate to speak with the well known economist and author of the Crash Course Chris Martenson. You can find out more about Chris and the Crash course at his website Peak Prosperity.

In part 1 of our 2 part interview Chris discusses:

• Why we shouldn’t talk about energy independence
• What the media is failing to report about the “massive” Shale discoveries
• How oil analysts are getting the economics wrong
• Why we could see $200 a barrel Oil in the Near Future
• The relationship between energy and the economy
• Why peak oil is not a defunct theory
• Why electric vehicles are the future
• Why natural gas should be a bridge to a new energy future
• Why Washington just doesn’t get it

Oilprice.com: You’re well-known for talking about the dangers of peak oil. But are you more optimistic about the future now that we find ourselves in the middle of an energy boom—thanks to improved extraction methods like fracking and other technologies, which have opened up massive oil and gas plays once thought to be unreachable or too expensive to get to market?

Chris Martenson: Good question. The relationship between energy and the economy is the most important thing that anyone can, and should, work to understand. In the past, we’ve always had whatever amounts of oil we wanted to support the sort of economy we operate, and that happens to be an economy that grows exponentially. The rate of growth that seems to work best at about 3% real and 6% nominal growth.

Now, between the 1960s and the 1980s, the world saw roughly a 6% per year growth in oil output. From 1980 to 2000, roughly 1.5%. And since then, almost flat, maybe a .1% growth in oil output.

So shale oil discoveries may be massive in terms of the total number of barrels of oil–but what they lack are high and sustained flow rates. And there’s a lot of confusion out there in the press right now, with several analysts that should know better, waving their hands at increasing reserves and then making the utterly wrong conclusion that peak oil is a defunct theory.

Now, to illustrate this, imagine we just found a trillion barrels 40,000 feet down. Yeah, that would awesome, right? No more peak oil, at least for a long time, right? Well, what if due to technological considerations, we could only get a few wells installed, and the max flow rate we could get from that reservoir was 100,000 barrels per day. Oh, that’s it? Well, that’s nice, but it doesn’t really help the overall situation, where we’re experiencing roughly 4,000,000 barrels per day,per year declines in existing conventional crude oil fields. That is, reservoir size and flow rates were well-correlated several decades ago, because the stuff just flowed out of the ground so easily, but now that we have to drill tens of thousands of feet to achieve a single well flow rate on the order of 100 barrels per day/per well in the shale plays, or we even have to scoop up tarry sand in giant machines and then power wash the bitumen off of it, oil just don’t quite flow quite like it used to.

There’s a new relationship between reserves and flow rates, and it’s a fraction of the old rate. And it’s an entirely new world, and this has been missed by the less insightful analysts and commentators out there. I am optimistic about the new reserves and flows but not because I happen to think they allow us to forget about the challenges and snap back to ‘how things used to be.’ We’re in a new regime of higher oil prices and that alone sets today well apart from the past.

Oilprice.com: In your crash course, you make an interesting point that America imports 10 million barrels of oil per day, which represents the same power equivalent as 750 nuclear plants. With the new oil fields opening up in the US, is it realistic to think that America could become energy independent?

Chris Martenson: Energy independence is another confusing term that’s recently, and I think regrettably, been introduced in the conversation. The various forms of energy are simply not interchangeable at this time. We have to consider them separately.

I’ve never thought that the US has an energy shortfall. We have a lot of coal, for example, but we do have a liquid fuel predicament. Right now, we move almost nothing from point A to point B using anything other than liquid fuels derived from petroleum. Together, electricity and natural gas account for perhaps 1% of everything that moves. I believe that we could and we should work very hard towards using electricity to move things, but to do so will require many trillions of dollars in investment in infrastructure, vehicles, storage technology.

I also believe we should use our remaining natural gas as a bridge fuel to get us to a new energy future that’s durable and provides us with a high quality of life. If we were on a path towards using electricity and natural gas to move things around, then I would be willing to entertain the idea of energy independence as a useful concept, because then the various fuels would be swappable. However, we’re not on any such path at all at this point in time, at least not meaningfully so.

We will not ever become energy-independent with respect to liquid fuels in the US unless demand absolutely craters due to an economic calamity of some sort.

Oilprice.com: Obviously making a change would take serious political will. Do you think that will exists at this point in time, or is it something that’s going to happen when people get a nasty shock?

Chris Martenson: I think we’re going to have to go with the nasty shock at this point. The political will just isn’t there. Recent events have really confirmed for me that Washington, D.C. just doesn’t get it. They really want to believe in the story that the US is a new energy powerhouse; just don’t want to look at the complexities that are actually involved in the story at this point in time.

So will we change through pain or insight? Those are the two main avenues of change, either at the individual or cultural level. I truly believe that pain is probably the most likely way we’re going to change in this story. Maybe not – hope springs eternal – but from a betting standpoint change will follow pain.

Oilprice.com: What do you see happening with the oil market in the coming, say, three to five years?

Chris Martenson: Despite all of the hoopla about tight oil, which I think has been oversold by the way, I remain focused on the fact that for whatever reasons, world oil production has been effectively flat for six years running despite a tripling in the price of oil. Brent crude remains solidly over 100 a barrel, and 2012 will be the highest yearly oil price on record for global oil.

So my ideas here are that oil’s an utterly non-negotiable necessity of modern life. Demand for it is going to grow further on the world stage. New oil discoveries all have a marginal cost of production that ranges from 60 bucks on the low end per barrel to 100 dollars per barrel on the high end. What this means is that my new floor, for the price of oil, is somewhere in the vicinity of $70 to $80 a barrel. That’s my low end target.

On the upper end, so much depends on whether the world economy finally recovers, which is looking increasingly unlikely, or whether there are further geopolitical difficulties in the few remaining productive oil basins, notably West Africa and the Middle East. Should either or both of those regions see their oil production shut in for any length of time, I can easily see the price of oil doubling from here to $200 a barrel, with very dire effects on the struggling world financial system.

Oilprice.com: What are your thoughts on the situation we are seeing with declining net energy returns?

Chris Martenson: This is really the important part of this conversation. I think it’s a subtle idea, but it’s actually the most important one here, and that is that net energy returns are what we run our society on. And the net energy returns we’re getting from these new finds are a fraction of those that we enjoyed in prior decades. So that surplus energy left over after exploring and extracting energy, that’s the stuff on which our complex, just-in-time economy runs.

With less surplus or net energy, there’s just less left over to do other things with, such as growing our debts–at nearly double the rate of underlying economic growth, which is what we’ve done for the past four decades. Or shipping billions of economic items tens of thousands of miles from low cost labor markets to high profit consumer markets. Those activities require net energy, and that’s the part of this story that’s really missing, that even if we have these large finds, the tight oil shale plays, the heavy oils, the ultra-deep water finds, the net energy we’re getting back from those is just a fraction of what we used to get.

Continued in part 2, tomorrow.

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42 comments

  1. joecostello

    What would be nice to add to this is the Harvard report released in June, by Leonardo Maugeri, who was an executive for Eni, the Italian oil company, 6th largest is what he likes to say.

    He simply extrapolated the shale rates to this point far into the future, amongst other questionable assumptions — what do you want from an oil executive one might ask. But this report has been the basis for all the new revolution nonsense, where we went from conventional wisdom of, “oh there’s no oil problem” to now see, there’s all this new supply no oil problem.

    The oil price spike of last decade has been far undervalued in the global economic problems of the last half-decade, Europe is paying $110 a barrel still. Martenson does a good job explaining the flow for this “new revolution”. Everyone knew the oil both in the shale and tar was there, the only think keeping it from developing was price, and that’s still unclear how much it is — try to find out from Chesapeake how much that fracked gas costs — but shale oil around $80 and for the tar sands that depends highly on the price of energy input, which using natural gas right now is well below sustainable at this point.

    The era of cheap oil is over, the global economy as it was in 2006 was developed on cheap oil. That all said, with global economy continuing to slow, oil could tank big time in ’13, lot of talk lately about the problems with too much supply and OPEC price…stay tuned.

  2. Hugh

    No discussion of the effects of speculation on pricing. Does anyone seriously think the looters overlooked commodities?

    1. Susan the other

      I think Chris Cook said there was such a devastating surplus (tankers used to store it till the price goes back up) that there was no market save the commodities traders and their derivatives.

    2. joecostello

      I know this hard for people educated on finance to get, but the oil industry sets the price for oil, the futures market is an add on. The oil industry is completely unregulated price wise, no New Deal institutions devised to regulate like what happened with Banks and utilities.

      This is important to understand, the oil industry sets price.

    3. Thisson

      This is a specious argument, for two reasons:

      First, speculators can only speculate to the extent that someone else wants to take the other side of the trade. For each speculative long, there is a speculative (or industrial hedge) short.

      Second, without speculators, the industrials would be unable to lay off risk by hedging. They would be forced to keep the risk, and would have to factor it into their pricing, which would make oil products MORE EXPENSIVE for consumers.

      1. different clue

        If the oil price went high enough, kunsoomurz ( pardon me, “consumers”) might become conservers instead.

    1. joecostello

      this is hardly a refutation of solar, has plenty of utility bs in it, particularly they cant wire the systems to run when the grid goes down because of “safety”.

      Germany makes lot of electricity from solar, is it is cheap as coal, no.

      1. A Real Black Person

        The physical technology for solar energy and other forms of renewable energy can only be made and maintained with fossil fuel products at this time.

        There is a also the issue of greater cooperation to cover a large geological area with solar panels in order to generate significant amounts of electricity. Looking at the stalling North Africa/ Europe deal with Desertec, where one side, the Europeans gaining more from it than the Africans.

        1. joecostello

          “There is a also the issue of greater cooperation to cover a large geological area with solar panels.”

          Like for example every roof, solar works best as distributed technology. That we currently have an energy infrastructure that evolved because of the cheap and abundant supply of fossil fuels, doesn’t mean we need to do the same with renewables, in fact we need to think about it differently.

          For example the idea of solar on rooftops and the “safety” canard, this is just the utilities refusing to operate the hundred year old grid any differently, there’s tremendous value to be gained for all those wires by adding more information and a smart infrastructure, the utilities refuse, they make plenty money the way it is.

          Talking about Africa, there could be no better energy boost for the majority there than getting some electricity off solar, they dont need a 20th century energy infrastructure they need a 21st, which means we here in the US dont have much to offer them. Just as mobile phones have completely bipassed the need of landline infrastructure in the last ten years.

          Change is coming one way or other folks.

          1. different clue

            Do cellphones cause brain cancer? We’ll find out in about 20-30 years. Well . . . the people who use cell phones will find out. I don’t have a cell phone myself. I use my primitive old legacy landline.

        2. different clue

          If we were to use fossil fuel products to maintain the solar energy infrastructure, at least we would not be using fossil fuel products to maintain an infrastructure based on burning even more fossil fuel products for energy.

          1. different clue

            Reply to True Dat actually . . .

            Maybe not so small a promise IF! . . we could shrink the economy and its energy usage to the level where ONly renewable energy would be used to do all the work that energy does. I read somewhere that 10 per cent of all the oil used is used to make things/chemicals/etc. and the other 90 percent is just BURNED to turn the wheels. Well, if we stopped altogether from using that 90 percent at all, then we would be using way less oil. Big if, I know.

      2. optimader

        Germany makes lot of electricity from solar, is it is cheap as coal, no

        In Thermodynamics tehre is a concept called a Control Volume http://en.wikipedia.org/wiki/Control_volume used as a method to define the battery limts of what is being evaluating.
        A conceptually valuable approach to considering, say the real comparative cost of energy sources. What are you including in the whole cost of coal (or solar for that matter)?

  3. psychohistorian

    The biggest shock to the US will be when oil prices ratchet up significantly in rural America where all the conservative folks live….with all those guns, but still part of the 99%……grin.

    What is going to happen when they can’t afford to maintain their rural life and want us city folk to subsidize them and all their gas hog toys?

    I believe that there might be a problem brewing there, whadaya think?

    Isn’t that where most of the evangelicals live? Maybe we should ask them, what did Jesus drive?

    The American Dream is about to become a nightmare because we can’t get our shit together to end the class based system controlled by the global inherited rich…..who are going to have to keep those evangelicals happy or that devils pact they made with them centuries ago might start to unravel.

    The devils pact I refer to is my read of history where in exchange for ongoing legitimacy the religious sects agreed to support accumulating private ownership of property/stuff and ongoing inheritance.

    1. different clue

      The rural conservatives will say that gas costs so much because you urban liberals prevented timely drilling in ANWR
      and off every plausible coast as well as all over the Great Lakes. They will come to get revenge on you.

      You may need guns, ammo, and training to protect yourselves from them. They won’t die quietly, you know.

      1. optimader

        The rural conservatives will say that gas costs so much because you urban liberals prevented timely drilling in ANWR
        ….You may need guns, ammo, and training to protect yourselves from them.

        A more likely scenerio is most won’t make it here (Chicago) because their 350Hp 4×4 Sears Sheds on Wheels will run out of gas.
        The ones that do make it will have their bones picked clean by the Black P Stone Rangers, Gangster Diciples, Latin Kings, El Rukens,Vice Lords etc etc.. when they blunder into the wrong neighborhood while jamming to Gosple Rock.

        http://www.wbez.org/programs/afternoon-shift/2012-09-24/chicago-gangs-abound-where-are-they-102612

        1. different clue

          Maybe. Or maybe they are not as dumm as you think in terms of tactics and casing-the-joint and etc. They might be able to tell the Gold Coast from the South Side and go exactly where they mean to go.

          1. Finnucane

            As a citizen of pelagic America, I can assure you that the guts guns n’ glory crowd is all talk, and nothing but talk … talk, talk, talk, until you’re blue in the face. A half a FARC front could wipe them all off the planet, if it came down to a real fight. And yes, they are that stupid. Really, being stupid is the point. I mean, stupidity is the priviledge of being an imperial subject. At the height of the power and reach of the British empire, wasn’t it a small minority of English that could identify more than two or three of Her Majesty’s overseas holdings? But to a man or woman they could poke out their elbows, glare indignant, and challenge anybody to a ‘fair fight.’

          2. Finnucane

            … and: of course they’d go to the South Side. The Gold Coasters are, after all, Job Creators! Gawd blezz ‘Merica! While the South Siders are, you know, …. no, but rather, they’ll stay home, buy ammo, and talk. And talk, and talk, and talk …

          3. different clue

            If you are correct, then we really have nothing to worry about on that score.

            I wonder what we would project if we picked a happier fantasy of “what they would do” to begin with. Though I guess that’s what Psychohistorian was offering to begin with.

            Only a real fool would think that the “South Siders” have anything whatever with the price of gas. Could anyone,
            ANNNYone, really be that utterly totally dumm?

    2. LifelongLib

      Re-read your history. In particular, check out the Levelers and Diggers in 17th Century England, as well as the Regulators and the Shays/Whiskey rebels in pre- and post-Revolution America (or for that matter, William Jennings Bryan and friends). You’ll find evangelists in all of them. I’m not one myself, but we’re in no position to turn away any help we can get.

    3. TrueDat

      The politics are regional/local. The on the ground energy realities are not. Unfortunately, we’re all f***ed in this together. “Can’t we all just get along?”, indeed!

  4. Max424

    Chris Martenson” “I’ve never thought that the US has an energy shortfall. We have a lot of coal, for example …

    Energy fans, coal and gas liquefaction is coming to a country near you ….

    http://www.nytimes.com/2012/12/18/business/energy-environment/sasol-betting-big-on-gas-to-liquid-plant-in-us.html?_r=0&adxnnl=1&ref=energy-environment&adxnnlx=1355912069-gA2GzreqCQTTz3NSDKN6uQ

    Sorry, climate change people, we’re going to have to put your issue on the back burner for a spell (euphemism warning: really talking the rest of eternity!), and yes, it is quite likely that the unattended back burner will at some point experience a melt thru, thereby incinerating us all, in our collective house.

    But (and it’s a big BUTT), possible extinction is a small price to pay, when there’s lightening fast, short term/interim profits to be made … every nanosecond of every minute of every day of every quarter!

    1. Hypothetical_Taxpayer

      I was a Sasol stockholder back when they built the Qatar GTL plant, and I’m surprised they would want to build one in the US.

      It had a projected cap cost of $1 Billion for a 32,000 bbl/day plant. They signed a long term NG contract with the Qatar government starting at 50 cent NG and escalated to still under a buck 50 years from now. (or whatever the then guv may charge)

      It ended up way over budget and they missed design thruput by 30%. And GTL was touted as a much simpler plant than CTL (coal to liquid).

      So now they say they can do a plant 3 times bigger for $14 billion and $4 NG?

      If we accept the premise that we do have a glut of NG and fracking is a good thing to do, then T. Boone Pickens did have the best idea of how to utilize it (besides running NG power plants instead of coal power plants) – which is convert long haul trucks to run on NG. Long haul trucking uses something like 10% of our total liquid fuels consumption so the gains here are significant.

      Beyond that, there are NG cars now – Honda Civic is available – for personal transportation. The big disadvantage is low energy density of CNG – so range is low and the “gastank” eats up lots of potential trunk space – but they still would make a good commuter car. But this is still better than what you get with present battery tech in electric cars.

      1. different clue

        About NG, the faster we use it the sooner we run out. Same as with any other non-renewable resource. I read somewhere that T Boone Pickens hyped the Nat Gas and the Wind Corridor concepts because he wanted to grab up rights of way so as to steal all the groundwater out from under the rights of way in the fullness of time. His whole energy
        concept was/is really a long-range stealth water-grab. Or so I have read.

        1. Hypothetical_Taxpayer

          Sounds like a GreenNut conspiracy theory. Pickens’ idea was to balance wind and NG power plants. Wind is variable power and NG power plants can run as “peakers” – they can vary output fairly easily to fill in when there is no/low wind.

          But he scaled back his wind farm plan a lot because of no transmission lines to the metro texas areas. (and he didn’t want to buy the land and build those)

          Of course he doesn’t like NG selling at $3, so he also promoted the long haul truck NG conversion idea. It seems like a good idea to me, anyway.

          As far as using up all our NG – they are building a NG export terminal now – which is dumb and dumber dipped in dumb. If you build new NG plants, they have a 40 year design life – so utilities think hard about supply over that time frame. But trucks might be good for 10 years? – so the cap investment timeframe is a better match for the uncertainty in long term supply, methinks.

    2. redleg

      It takes water to convert coal to liquid fuel. Clean water will be a bigger constraint on development than most people can imagine.

    3. TrueDat

      Martenson and all the rest are about to go the way of the dinosaur/human. Dollars/shmollers! Give me something that’s actually WORTH something!!! Food? Water? Shelter? REAL security? Anyone? Anyone? Anyone?

        1. different clue

          And food to woo them with. “Would you like to come up to my apartment and see my food collection?”

  5. Susan the other

    No mention of trains. We are still in automobile euphoria; that’s dangerous. A chicken in every pot and a battery in every car. Whether cars are electric or diesel we still have a huge pollution-warming-waste of resources problem compared to a decent train network. I’m OK with electric cars, but I’d rather have good trains and buses. And another thing Martenson mentioned without explaining is that it costs extra to wash the tar sands. Wash the tar sands to extract the oil? This sounds like that stuff BP used to spray in the gulf to emulsify the oil slick. Betcha it’s too toxic to talk about. At $200/Barrel oil might fit into Steve Keen’s new model of an energy based economy which is accurate and balances all of our ignored liabilities. Maybe it’s even too cheap. But we still have the very big problem of obliterated markets (storing oil in tankers) and thus fake economies. I’m not sure where all this is going.

    1. TrueDat

      Actually, we just have a problem of “free markets.” But that’s going away soon, one way or another. Cars with them. Good riddance! Your progeny will thank WORSHIP you!

  6. kevinearick

    It’s all kick the can, and they have run out of room, with no economic growth possible. The tax base is completely monetized, so it doesn’t matter whether they raise taxes or cut spending. Labor primes the pump for capital, from the bottom up, until it doesn’t, then it swaps polarity, leaving capital to run out its slack and choke itself, like a dog reaching the end of its chain, only the collar is sharp.

    1. kevinearick

      have you seen the lakes; little harder to hide them in hospitals and universities like radioactive waste.

    2. TrueDat

      Everything that can be bought and sold will be, until it can’t any more. That was/is always the intention of any properly devised ponzi/shell game. And to think, any “decent economist” worth his salt circa 1900 could have predicted all this shit ahead of time and saved us all the trouble of actually living it. HUMANS! Big brains, even BIGGER hubris, equals EVEN BIGGER FAIL! Alas, this time it appears to be EPIC!

      Growth is done, and with it, the human experiment it seems. Pity the monkeys we came from. They never could have imagined that this would be their fate. Or could they?

      1. different clue

        The Ba mButi Pigmies in the Ituri Rain Forest are also part of the human experiment. The Aymara alpaca herders around Lake Titicaca are also part of the human experiment.
        If everyone else on earth dies, but if those two groups of people remain alive, then the human experiment continues.

        A lot of Modern Civilization people confuse Modern Civilization with “the” human experiment. Modern Civilization is just one of many ongoing human experiments.

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