By Michael T. Klare, a professor of peace and world security studies at Hampshire College and the author, most recently, of The Race for What’s Left. A documentary movie version of his book Blood and Oil is available from the Media Education Foundation. Follow him on Twitter at @mklare1. Originally published at TomDispatch
Three and a half years ago, the International Energy Agency (IEA) triggered headlines around the world by predicting that the United States would overtake Saudi Arabia to become the world’s leading oil producer by 2020 and, together with Canada, would become a net exporter of oil around 2030. Overnight, a new strain of American energy triumphalism appeared and experts began speaking of “Saudi America,” a reinvigorated U.S.A. animated by copious streams of oil and natural gas, much of it obtained through the then-pioneering technique of hydro-fracking. “This is a real energy revolution,” the Wall Street Journal crowed in an editorial heralding the IEA pronouncement.
The most immediate effect of this “revolution,” its boosters proclaimed, would be to banish any likelihood of a “peak” in world oil production and subsequent petroleum scarcity. The peak oil theorists, who flourished in the early years of the twenty-first century, warned that global output was likely to reach its maximum attainable level in the near future, possibly as early as 2012, and then commence an irreversible decline as the major reserves of energy were tapped dry. The proponents of this outlook did not, however, foresee the coming of hydro-fracking and the exploitation of previously inaccessible reserves of oil and natural gas in underground shale formations.
Understandably enough, the stunning increase in North American oil production in the past few years simply wasn’t on their radar. According to the Energy Information Administration (EIA) of the Department of Energy, U.S. crude output rose from 5.5 million barrels per day in 2010 to 9.2 million barrels as 2016 began, an increase of 3.7 million barrels per day in what can only be considered the relative blink of an eye. Similarly unexpected was the success of Canadian producers in extracting oil (in the form of bitumen, a semi-solid petroleum substance) from the tar sands of Alberta. Today, the notion that oil is becoming scarce has all but vanished, and so have the benefits of a new era of petroleum plenty being touted, until recently, by energy analysts and oil company executives.
“The picture in terms of resources in the ground is a good one,” Bob Dudley, the chief executive officer of oil giant BP, typically exclaimed in January 2014. “It’s very different [from] past concerns about supply peaking. The theory of peak oil seems to have, well, peaked.”
The Arrival of a New Energy Triumphalism
With the advent of North American energy abundance in 2012, petroleum enthusiasts began to promote the idea of a “new American industrial renaissance” based on accelerated shale oil and gas production and the development of related petrochemical enterprises. Combine such a vision with diminished fears about reliance on imported oil, especially from the Middle East, and the United States suddenly had — so the enthusiasts of the moment asserted — a host of geopolitical advantages and fresh life as the planet’s sole superpower.
“The outline of a new world oil map is emerging, and it is centered not on the Middle East but on the Western Hemisphere,” oil industry adviser Daniel Yergin proclaimed in the Washington Post. “The new energy axis runs from Alberta, Canada, down through [the shale fields of] North Dakota and South Texas… to huge offshore oil deposits found near Brazil.” All of this, he asserted, “points to a major geopolitical shift,” leaving the United States advantageously positioned in relation to any of its international rivals.
If the blindness of so much of this is beginning to sound a little familiar, the reason is simple enough. Just as the peak oil theorists failed to foresee crucial technological breakthroughs in the energy world and how they would affect fossil fuel production, the industry and its boosters failed to anticipate the impact of a gusher of additional oil and gas on energy prices. And just as the introduction of fracking made peak oil theory irrelevant, so oil and gas abundance — and the accompanying plunge of prices to rock-bottom levels — shattered the prospects for a U.S. industrial renaissance based on accelerated energy production.
As recently as June 2014, Brent crude, the international benchmark blend, was selling at $114 per barrel. As 2015 began, it had plunged to $55 per barrel. By 2016, it was at $36 and still heading down. The fallout from this precipitous descent has been nothing short of disastrous for the global oil industry: many smaller companies have already filed for bankruptcy; larger firms have watched their profits plummet; whole countries like Venezuela, deeply dependent on oil sales, seem to be heading for receivership; and an estimated 250,000 oil workers have lost their jobs globally (50,000 in Texas alone).
In addition, some major oil-producing areas are being shut down or ruled out as likely future prospects for exploration and exploitation. The British section of the North Sea, for example, is projected to lose as many as 150 of its approximately 300 oil and gas drilling platforms over the next decade, including those in the Brent field, the once-prolific reservoir that gave its name to the benchmark blend. Meanwhile, virtually all plans for drilling in the increasingly ice-free waters of the Arctic have been put on hold.
Many reasons have been given for the plunge in oil prices and various “conspiracy theories” have arisen to explain the seemingly inexplicable. In the past, when prices fell, the Saudis and their allies in the Organization of the Petroleum Exporting Countries (OPEC) would curtail production to push them higher. This time, they actually increased output, leading some analysts to suggest that Riyadh was trying to punish oil producers Iran and Russia for supporting the Assad regime in Syria. New York Times columnist Thomas Friedman, for instance, claimed that the Saudis were trying to “bankrupt” those countries “by bringing down the price of oil to levels below what both Moscow and Tehran need to finance their budgets.” Variations on this theme have been advanced by other pundits.
The reality of the matter has turned out to be significantly more straightforward: U.S. and Canadian producers were adding millions of barrels a day in new production to world markets at a time when global demand was incapable of absorbing so much extra crude oil. An unexpected surge in Iraqi production added additional crude to the growing glut. Meanwhile, economic malaise in China and Europe kept global oil consumption from climbing at the heady pace of earlier years and so the market became oversaturated with crude. It was, in other words, a classic case of too much supply, too little demand, and falling prices. “We are still seeing a lot of supply,” said BP’s Dudley last June. “There is demand growth, there’s just a lot more supply.”
A War of Attrition
Threatened by this new reality, the Saudis and their allies faced a painful choice. Accounting for about 40% of world oil output, the OPEC producers exercise substantial but not unlimited power over the global marketplace. They could have chosen to rein in their own production and so force prices up. There was, however, little likelihood of non-OPEC producers like Brazil, Canada, Russia, and the United States following suit, so any price increases would have benefitted the energy industries of those countries most, while undoubtedly taking market share from OPEC. However counterintuitive it might have seemed, the Saudis, unwilling to face such a loss, decided to pump more oil. Their hope was that a steep decline in prices would drive some of their rivals, especially American oil frackers with their far higher production expenses, out of business. “It is not in the interest of OPEC producers to cut their production, whatever the price is,” the Saudi oil minister Ali al-Naimi explained. “If I reduce [my price], what happens to my market share? The price will go up and the Russians, the Brazilians, U.S. shale oil producers will take my share.”
In adopting this strategy, the Saudis knew they were taking big risks. About 85% of the country’s export income and a staggeringly large share of government revenues come from petroleum sales. Any sustained drop in prices would threaten the royal family’s ability to maintain public stability through the generous payments, subsidies, and job programs it offers to so many of its citizens. However, when oil prices were high, the Saudis socked away hundreds of billions of dollars in various investment accounts around the world and are now drawing on those massive cash reserves to keep public discontent to a minimum (even while belt-tightening begins). “If prices continue to be low, we will be able to withstand it for a long, long time,” Khalid al-Falih, the chairman of Saudi Aramco, the kingdom’s national oil company, insisted in January at the World Economic Forum in Davos, Switzerland.
The result of all this has been an “oil war of attrition” — a struggle among the major oil producers for maximum exposure in an overcrowded energy bazaar. Eventually, the current low prices will drive some producers out of business and so global oversupply will assumedly dissipate, pushing prices back up. But how long that might take no one knows. If Saudi Arabia can indeed hold out for the duration without stirring significant domestic unrest, it will, of course, be in a strong position to profit when the price rebound finally occurs.
It is not yet certain, however, that the Saudis will succeed in their drive to crush shale producers in the United States or other competitors elsewhere before they drain their overseas investment accounts and the foundations of their world begin to crumble. In recent weeks, in fact, there have been signs that they are beginning to get nervous. These include moves to reduce government subsidies and talks initiated with Russia and Venezuela about freezing, if not reducing, output.
An Oil Glut Unleashes “World-Class Havoc”
In the meantime, there can be no question that the war of attrition is beginning to take its toll. In addition to hard-hit Arctic and North Sea producers, companies exploiting Alberta’s Athabasca tar sands are exhibiting all the signs of an oncoming crisis. While most tar sands outfits continue to operate (often at a loss), they are now postponing or cancelling future projects, while the space between the future and the present shrinks ominously.
Just about every firm in the oil business is being hurt by the new price norms, but hardest struck have been those that rely on “unconventional” means of extraction like Brazilian deep-sea drilling, U.S. hydro-fracking, and Canadian tar sands exploitation. Such techniques were developed by the major companies to compensate for an expected long-term decline in conventional oil fields (those close to the surface, close to shore, and in permeable rock formations). By definition, unconventional or “tough oil” requires more effort to pry out of the ground and so costs more to exploit. The break-even point for tar sands production, for example, sometimes reaches $80 per barrel, for shale oil typically $50 to $60 a barrel. What isn’t a serious problem when oil is selling at $100 a barrel or more becomes catastrophic when it languishes in the $30 to $40 range, as it has over much of the past half-year.
And keep in mind that, in such an environment, as oil companies contract or fail, they take with them hundreds of smaller companies — field services providers, pipeline builders, transportation handlers, caterers, and so on — that benefitted from the all-too-brief “energy renaissance” in North America. Many have already laid off a large share of their workforce or simply been driven out of business. As a result, once-booming oil towns like Williston, North Dakota, and Fort McMurray, Alberta, have fallen into hard times, leaving their “man camps” (temporary housing for male oil workers) abandoned and storefronts shuttered.
In Williston — once the epicenter of the shale oil boom — many families now line up for free food at local churches and rely on the Salvation Army for clothes and other necessities, according to Tim Marcin of the International Business Times. Real estate has also been hard hit. “As jobs dried up and families fled, some residential neighborhoods became ghost towns,” Marcin reports. “City officials estimated hotels and apartments, many of which were built during the boom, were at about 50-60% occupancy in November.”
Add to this another lurking crisis: the failure or impending implosion of many shale producers is threatening the financial health of American banks which lent heavily to the industry during the boom years from 2010 to 2014. Over the past five years, according to financial data provider Dealogic, oil and gas companies in the United States and Canada issued bonds and took out loans worth more than $1.3 trillion. Much of this is now at risk as companies default on loans or declare bankruptcy. Citibank, for example, reports that 32% of its loans in the energy sector were given to companies with low credit ratings, which are considered at greater risk of default. Wells Fargo says that 17% of its energy exposure was to such firms. As the number of defaults has increased, banks have seen their stock values decline, and this — combined with the falling value of oil company shares — has been rattling the stock market.
The irony, of course, is that the technological breakthroughs so lauded in 2012 for their success in enhancing America’s energy prowess are now responsible for the market oversupply that is bringing so much misery to people, companies, and communities in North America’s oil patches. “At the beginning of 2014, [the U.S.] was pumping so much oil and gas that experts foresaw a new American industrial renaissance, with trillions of dollars in investments and millions of new jobs,” commented energy expert Steve LeVine in February. Two years later, he points out, “faces are aghast as the same oil instead has unleashed world-class havoc.”
The Geopolitical Scorecard From Hell
If that promised new industrial renaissance has failed to materialize, what about the geopolitical advantages that new oil and gas production was to give an emboldened Washington? Yergin and others asserted that the surge in North American output would shift the center of gravity of world production to the Western Hemisphere, allowing, among other things, the export of U.S. liquefied natural gas, or LNG, to Europe. That, in turn, would diminish the reliance of allies like Germany on Russian gas and so increase American influence and power. We were, in other words, to be in a new triumphalist world in which the planet’s sole superpower would benefit greatly from, as energy analysts Amy Myers Jaffe and Ed Morse put it in 2013, a “counterrevolution against the energy world created by OPEC.”
So far, there is little evidence of such a geopolitical bonanza. In Saudi attrition-war fashion, for instance, Russia’s natural gas giant Gazprom has begun lowering the price at which it sells gas to Europe, rendering American LNG potentially uncompetitive in markets there. True, on February 25th, the first cargo of that LNG was shipped to foreign markets, but it was destined for Brazil, not Europe.
Meanwhile, Brazil and Canada — two anchors of the “new world oil map” predicted by Yergin in 2011 — have been devastated by the oil price decline. Production in the United States has not yet suffered as greatly, thanks largely to increased efficiency in the producing regions. However, pillars of the new industry are starting to go out of business or are facing possible bankruptcy, while in the global war of attrition, the Saudis have so far retained their share of the market and are undoubtedly going to play a commanding role in global oil deals for decades to come (assuming, of course, that the country doesn’t come apart at the seams under the strains of the present oil glut). So much for the “counterrevolution” against OPEC. Meanwhile, the landscapes of Texas, Pennsylvania, North Dakota, and Alberta are increasingly littered with the rusting detritus of a brand-new industry already in decline, and American power is no more robust than before.
In the end, the oil attrition wars may lead us not into a future of North American triumphalism, nor even to a more modest Saudi version of the same, but into a strange new world in which an unlimited capacity to produce oil meets an increasingly crippled capitalist system without the capacity to absorb it.
Think of it this way: in the conflagration of the take-no-prisoners war the Saudis let loose, a centuries-old world based on oil may be ending in both a glut and a hollowing out on an increasingly overheated planet. A war of attrition indeed.
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The analysts just don’t get it.
Oil prices are bifurcated: the ‘finance’ price — what the drillers and specs can ‘discover’ on futures markets — is one. The other is what customers must pay to buy drillers’ products.
The marginal customers are broke and they cannot pay. Whatever the drillers do they still cannot pay.
The more loans finance throws at drillers, the greater the manipulation in finance markets, the further underwater the drillers fall.
Alternative energy is now cheaper than fossils. Sure, there is variability, however, there is not 12000 km long JIT-supply trains to ever more unstable / unpleasant countries and regions and the built-in sponsorship of global warmongering and terrorism. Spice with a dash of financial instability and “Locality” is King.
Prince Yamani said in 2000:
Prince Yamani was only 10 years off, which is not too bad in the prediction business.
– The Stone Age came to an end, not because we had a lack of stones
That is a superb quote.
The quibble is that it refers to burning the oil. The emergy contained in oil has to be compared to the energy costs of creating, for example, plastics from scratch. There is simply no effective alternative to a substance that has been concentrating carbon bonds for billions of years.
That we’re burning it up has been short-sighted. Burning the house down for heat in the winter. But the process of selection only cares who’s there in the spring. Tough world.
The change in the world energy markets in just the last 18 months alone has been remarkable, and its very difficult to know for sure what it truly means, not least because nobody seems to know for certain how long the various players can hold out. I suspect the Saudi’s have decided they have to dig in for a long battle, they wouldn’t have started domestic austerity measures otherwise.
It does seem that one of the big winners is supposedly the big loser – Russia. Its pretty clear they are using a combination of smart diplomacy and military might to increase their influence over OPEC. Putin has shown a ruthlessness and farsightedness apparently beyond all the other players.
The key question though for all our futures is what it means for the transition from fossil fuels. I’ve been surprised so far at how little impact it has, mainly because I think of rapid reductions in costs in solar energy in particular, and the new generations of large 3MW+ wind turbines are proving extremely profitable in the right areas. Of course, wind and solar tend to compete in the electricity market, where oil/gas prices are not so crucial. There is also the factor that high wind energy production cuts directly into gas use in many countries, so even very low gas prices may be irrelevant in terms of increasing demand if it is mostly up against renewables.
The bad news however seems to be for the electric car industry – lots of anecdotal evidence that people are back to buying gas guzzlers.
In the longer run, I do think this is good news for the transition. There have been massive cut backs in exploration and new production facilities – even if prices rose tomorrow to $100 it would take years for the industry to recover. It does seem that the connection between low prices = rapidly rising demand seems to have been broken – investors are very wary of fossil fuels (not just production, in choosing supplies), momentum seems to have decisively shifted to renewables.
In my opinion, peoples “heart” has been changed by the ongoing crisis. Many people, self included, took real losses on over-sized, over-mortgaged, property and had to cut back on the “size” of ones lifestyle to a level that could be sustained on one salary while repairing the losses.
During this “rightsizing” process, for me and the people I know at least, realized that the meaning of “well off” has changed from having “a lot of everything, and big too” to “have enough to do what we want now”. To chose how to spend money, priorities are on fewer, better things. Smaller cars, which are cheap to run. My friends dumped the SUV’s and Jaguar’s for mid-range Ford and Nissan – the tires for the Jaguar costs more than the down payment on a small Nissan. Do we enjoy buying tires? Hell No!
It is nice to go home early because the new home is so much much cheaper. I enjoy traveling, tickets are cheap if one can go at any time. I can now afford not to work for a few weeks, if I need to. Before, I had on-call and overtime for the “fun money”.
So, sure, I can buy a gas-guzzler and run it on cheap petrol. Maybe this is in fact more economical than the hybrid I will buy.
But, I like the hybrid more, I like the idea of not having to pay a lot of rent to a bunch of Saudi or Russian nutters. A Tesla is much more fun to drive than any petrol car, but, I couldn’t afford that. A friend of mine has one. He cruises Europe more or less for free.
Probably, I will put solar cells on the roof too. The thing is that the electrify price here (Sweden) is very low, about 0.1 EUR/kWh, yet those solar panels will still repay themselves in 10 years. I still like having them because it feels nice to not need E.On. In case.
I guess what happened was that we all got fooled and burned thoroughly by our own stupidity in the 00’ies now we are trying to disconnect ourselves from the causes of this – and learning along the way that we can actually have our pies and eat it too, if we work at it!
I think that “free” Teslas do not exist. The cost of the machines is upfront, like paying for solar generated electricity but believing that it’s free because there are no current payments.
There must be some good bargains available on Jaguars and cetera; the differences could offset the tire costs. I, myself, never tire of tire shopping and find it preferable to shopping for cheap travel tickets.
There’s also a good chance that used Teslas will come on the market as maintenance costs and tire replacement costs come up. If you put a few bucks away -of the money you save with your different home and car- you’d free yourself from nutters worldwide and not help Russia win.
Yes, I think there has been a generational change – even fairly well off younger people are opting for smaller homes and living in cities. The desire for 5,000 sq ft houses in the suburbs is as much a cultural thing as anything else – in most north European countries even the rich don’t bother with very large houses, they would prefer a good address.
The direct economic effect can wear off quite quickly, but people do have long memories – its like how the war generation always seemed more frugal than later generations. Changes in attitudes like this can happen surprisingly rapidly – it certainly seems to be happening with car use.
The problem of course with vehicles is that the cheapest vehicle for a lot of people is a used large truck or SUV or other gas guzzler. Hybrids and battery cars have a huge disadvantage in that they will need replacement battery packs after a few years use, so the second hand market will alway be suspicious of them. I would certainly be reluctant to buy a 5 year old Prius for just that reason.
Unfortunately, there is such a legacy of older vehicles around – and they last an annoyingly long time – it will be a couple of decades before most countries car fleet becomes meaningfully low carbon.
Yes. I am a mail carrier and deliver packages/mail/catalogs/magazines every day. I can pretty much guess the relative disposable income of any home on my route and their spending habits. After the Crash of ’08 a LOT of my customers cut WAY back on their ordering and consumption, and have not recovered to anywhere near the level they were buying from ’98 to ’07. They are a LOT more careful in what and how much they purchase. Our (the Post Office) mail volume has recovered quite a bit in the last 3 years, mostly due to an increase in internet ordering, but my former “super shoppers” still are not at their former volume. People have become more like their grandparents from the ’50’s, using the credit card more carefully. Such consumption habits do not bode well for a consumer-based economy dependent on unlimited buying binges.
– It does seem that one of the big winners is supposedly the big loser – Russia.
As long as carbon keeps getting burned, Russia wins. This extends beyond fossil fuels to the methane clathrates in the sea floor. Russia’s greatest strategic gain will be year-round ports with direct access to ocean waters. Russia has placed itself in the position to make financial gains from high pipeline prices, while putting Europe in an energy chokehold. But low prices serve the larger goal.
(This is an outlier/wingnut position I have not seen expressed anywhere else. However, having a major global power committed to increasing global warming is of such critical importance that I will keep banging the gong.)
Yes, one factor often overlooked is that while there are no winners in a world of 2C+ climate rise, Russia would probably be least harmed. They will suffer terrible heatwaves and forest fires around populated areas, but there is also every chance that as permafrost melts they will reap a vast bounty of new agricultural land and extra ‘new’ inhabitable lands to the north and in Siberia.
So while Putin is not a denier, and like a lot of authoritarians takes quite a pragmatic approach to climate change, he must be aware that its nowhere near as bad for him as for everyone else. So he will not be so interested in promoting alternatives for their own sake.
Having said that, the Russians have been even more ruthless than the Saudi’s when it comes to creating monopolies for power – I have no doubt they will attempt to destroy the LNG market by dumping if they can. So even in pragmatic terms, a Russian led fossil fuel industry would be very bad news for US and Gulf companies.
Concur.
As global warming makes China and India less habitable, 500 million Chinese and 500 million Indians may well want to move to Russia to live on all that wonderful new land. How will Russia respond to that?
That’ll be a negotiation. Perhaps they might find a common enemy to unite against.
It’ll be beautiful.
For what it’s worth I’ve noted that in tough times people who have no money, or little, are stuck with second hand goods or goods that are cheap to buy initially and with which people can make do.
“Gas guzzlers” were sold cheaply during the first OPEC crisis in the 70’s as poorer people were stuck with the shittyshittybig cars traded in by buyers of the newer and compact alternatives, or the pieces of junk they’d bought previously and couldn’t afford to unload at dive, pull, or push prices. Back then a lot of people could afford to float boats bought for low prices and operated with ‘highcost’ fuel because the difference was meted out in drabs.
Today, what with the wonderful deals available, my poor buddies and I can pretend to afford (no pun) to lease or buy newer cars and older big engined machines because the upfront costs can be dribbled out at two week periods for 84 months with no down payment, no security charges and no interest to speak of. Maintenance costs cause no concern. Availability also plays a role, with miles and miles and miles of the older cars handy, and ditchable in the event of a job loss.
The father of a college buddy of my brother’s was a wildcatter in the Texas panhandle.
In good years, he’d give everybody microwave ovens for Christmas (when they were much costlier than today).
In really great years, he’d park new Cadillacs with a bow tied round them in the driveways of his friends and family.
But in crash years like this one, he’d hit you up for ten dollars at the Christmas party.
Commodities are deeply cyclical, and no one has ever figured out how to change that.
derivatives can’t stop a crash? I’m wondering how to make environmental assets into commodities. It’s like all commodities are like gold in a gold rush… insane.
‘It does seem that the connection between low prices = rapidly rising demand seems to have been broken – investors are very wary of fossil fuels (not just production, in choosing supplies), momentum seems to have decisively shifted to renewables.’
The reason you may be premature is the same reason the economic benefit of low oil prices for consuming regions/sectors has been a lot less than predicted by mainstream consensus economists and official opinion – the uncertainty about how long such low prices might prevail confounds consumers of all sizes that might otherwise take advantage ( eg, gas guzzlers already existed and production could be ramped). Contrary to the author of this piece, I believe that uncertainty could be removed by the Saudis with one press conference and the commitment to provide oil at $70/barrel for the next 30 years. That is forever in US culture.
Fracking actually follows “peak oil” exactly as expected.
This in that the scarcity is not about oil as a whole, but easily accessible oil.
This in turn drives the price up, while also enabling formerly unprofitable extractions, thus making it less suitable for various production processes that it earlier enabled.
The Saudi move is likely the death trows of an old system, something akin to a stuck continental plate suddenly moving again, than any long term trend.
Not helping that we are seeing a proxy war going on between oil extraction centered economies, that need to turn oil into weapons they can hand to their proxies.
‘Fracking actually follows “peak oil” exactly as expected.’
Exactly. I think it was Arthur Berman who said that shale oil wasn’t a revolution, but a retirement party. The technology has been around for fifty years, but wasn’t profitable to use until a barrel of oil went north of $100.
Most of the “peak-oil theorists” that I’ve followed for years have been petroleum engineers and geologists, but what do they know compared to a professor of world peace and security?
Partially right – but the author got a lot wrong.
The nonsense about production costs in the USA being too high
“…….. especially American oil frackers with their far higher production expenses” —- is simply not true.
I drilled and completed Niobrara Shale – 9,300 ft completion in September 1979. In the southern part of the Powder River Basin east of Douglas Wy. Came in at 725 / Bbl. & 1.5 MMCF gas a day at 1175 BTU’s.
Yes we fracked – then – but directional drilling was not viable technology at that time. The chemical mix was different and max pressure attainable today was not available.
Fast forward 35 years: directional drilling and better chemical and pressures available.
So what was the real “intrinsic” difference in 35 years. NONE!!!
The “decline curve” for production / reserves of SHALE – is the same as 1979!!! with and without the “Technology”
While that well paid for my children’s tuition at NYU & Carnegie Mellon – the decline curve went from 725 / bbl./day to 18 / bbl./day in 2010. when i sold my working interest – most of decline – 95% – was done after less than 40 months.
Production costs were essentially the same for 30 years.
The “decline curve” from 1979 + 40 months can be overlaid on wells completed in 2014 in the Bakken in North Dakota and it is essentially the same. The cost of the technology – much, much higher for directional plus fracking in 2014 – cannot overcome the decline curve’s marginal cost to yield better answer than technology cost in 1979 and pay the money back with reasonable return on the considerable risk.
The issue is the decline curve vs ZIRP – not production costs – Shale at real historical risk cap rates doesn’t work at all unless the price is really high and the money really stupid.
Dirt Cheap Money and Wall Street BS are alchemist brew that in the end cant overcome the overriding issue. But the dumb and stupid money will always be in abundance to drill up a storm.
+
“Shale at real historical risk cap rates doesn’t work at all unless the price is really high and the money really stupid” – nice summary of the issues on the supply side.
Financial engineering vs. petroleum engineering.
All by yourself? Impressive.
4 partners – I had 23.333% Working Interest – which means i was directly at risk – that’s what a WI demands
never claimed 100% interest!
Entire Field – 10,000 contiguous acres – was later farmed out to Inexco in Houston in early 80’s with Leon Hess putting up the money.
This article is a decent summary, but I think the author, as well as Bob Dudley, are wrong regarding “The theory of peak oil seems to have, well, peaked.”
As long as the EROEI (Energy Returned On Energy Invested) continues to fall, and it seems that it will at this time, Peak Oil is alive and well.
Yes – peak ‘conventional’ oil has already peaked – around 2012 if I recall my figures correctly. It is weak demand as much as anything which is behind the current surplus. Unconventional sources can at best only allow the peak to be maintained for longer, it almost certainly cannot push production much farther than at present. And the rapid depletion rate of fracking wells means its a short term solution at best.
PK, thanks for your informed comments on this thread.
Thanks Mike. I would have to say I’m a curious amateur (my professional speciality has only a tangental overlap with oil issues), so please don’t take what I write as gospel.
Anyone have an idea at what prices will the US per capita consumption start dropping again? And how that price compares to what is “sustainable” for the Western producers?
’cause if that price is higher, I would still classify the situation as peak oil.
I think thats very much a moving target – and it depends on the speed of change as much as the final cost. I think its generally reckoned that over $80 a barrel starts to have a significant impact, over $120 and it can push an economy into recession.
However, in reality, its not that simple as there are all sorts of other issues to consider. For example, if the high prices feed in to inflation and the Fed decides this results in a need for higher interest rates, the indirect impact can be even higher.
World oil prices tripled between 2000 and 2010. OPEC’s cartel established the oil price around $100 by constraining supply. Had they been a little freer with supply, they could have set an oil price closer to $85 rather than $100.
Most of the producers in the West saw themselves as “price takers”. They ran their economics at the $100 number and saw the means to drive production costs lower mostly through efficiency gains and economies of scale. Their economics made since and there was a bit of a gold rush as private equity and the banks all confirmed their analysis.
The latest much-lower oil prices have now driven further efficiency improvements that will allow these same companies to make money at lower numbers. $60 oil right now seems really reasonable and $70 oil seems like a dream.
The reality is that fracking only added about 4 million barrels of crude oil out of the 92 million barrels of oil consumed everyday. This is less than the global annual oil decline rate if no additional oil was produced.
In the meantime, there has been at least half a trillion dollars of investment that has been cancelled or deferred. The cost of capital is now clearly going to be higher as the market recognizes greater price uncertainty; this holds true for fossil capital but also for renewable capital. The existing oil surplus that caused all this havoc is reportedly only one or two million barrels. We have now set the forces in motion for some serious oil shortages within the next few years which will be characterized by price spikes and market disruptions.
There is a legitimate reason why cartels are illegal in the United States. Their self-serving behavior unleashes global market forces with a lot of unintended consequences. If these guys remain in charge, “Who shall guard the guards?”.
The best news in all this is that OPEC has managed to inflict considerably more harm on themselves than they have on the rest of the world; there seems to be less money available to support Islamic fundamentalism over the past 14 months and that’s not a bad thing. Sure, we’ll have a few companies go bankrupt in the U.S., but those same reservoirs will be developed by another company or the original debtors of those companies as the assets emerge from bankruptcy.
I’ve seen calculations about the effect of increased reserves (or increased percentage extraction) on the time of peak oil. There is a sharp inflection in the curve between increasing production and what’s called the “undulating plateau.” That plateau is where we are at now, as oil producers pull out all the tricks to extend the life of existing wells, find new ones, and extract more difficult oil. Because of that sharp inflection, even a doubling of available resources only pushes the inflection point back by a decade.
Gluts end.
Or, as Randy Udall put it, eventually the physics of energy wins out over the politics of energy.
What I found missing from the article and the discussion as of 8:30 am Arizona time is any mention of the exemptions from certain sections of a number of the major federal environmental laws. The whole fracking industry owes its very existence to the willingness of this generation to poison the water supplies of future generations. This is pretty much how America and the rest of the Western Civilization it purports to lead (off a cliff?) works: find some way to make money that doesn’t immediately kill millions of people then make it ‘legal’. The growth of distributed renewable energy is being slowly, quietly strangled in the same way – just pass laws insuring that only large investors can profit from it.
I suppose we should just accept Dick Cheney’s wisdom and guidance. After all, fracking only poisons future generations’ water for (what?) few thousand years, whereas nuclear power, as presently practiced, poisons the earth until the end of time. So let’s all just sit back and accept the wisdom of markets created by the wizards in Washington and watch as they attempt to repeal the laws that really govern the planet. See it really doesn’t matter what technology evolves that could really give the world’s population a chance of a decent, sustainable existence if we are too stupid, too contaminated by short term thinking, too dulled by political inertia and deadlock to take advantage of them. Eat, drink and be merry for tomorrow we die (and shortly thereafter, our children – but maybe that’s the idea?)
P.S. I have to add another sales plug for the GM Volt. If you on average drive less than 40-50 miles a day, there is no excuse save maybe ‘the wisdom of the marketplace’ (created by Dick Cheney) not to own or lease one. But electric and range-extended electric vehicles will not save the country or the world if the body politic is too stupid to insist we transition to them ASAP – and back to the mass transit systems the likes of GM conspired to destroy in the US after WWII. See Taken for a Ride on the Interstate Highway System
Just remembering the arguments made a while back by OilPrice and the IEEE that alt energy (wind and solar) were not just expensive but their manufacture caused more CO2 and environmental toxins than the use of fossil fuel. But the reality is that we have to act to reduce all of it, whatever it is. I even suspected that we were pushing for natgas and LNG because the fumes escaped into the atmosphere anyway, so why not burn it up? Witness Porter Ranch and all the methane bubbling up from the thawing tundra. I don’t really buy this market analysis (yes it is true there is no demand) simply because the financial collapse happened in 2008, not 2012. Since then we have tried to keep the price up by storing oil even in tankers all around the world. I also do not believe that a real estate bubble in the US brought the world to its knees. I believe global warming is such a dire emergency that we engineered the whole thing. It looks like a market phenomenon now but it is only a reaction. But it still makes for a good cover-up.
A few remarks:
1. What will decide the success of Saudi tactics is the extent to which the American authorities are willing to backstop or bail out their frackers. It is possible that for power-political reasons American authorities will do wahtever it takes to their frack sector alive. Saudi oil production costs are low, but American money production cost is practically zero.
2. The power-political advantage for very high American fuel production is not that the USA would necessarily turn into a leading exporter. Instead, the advantage is best understood in negative terms: high domestic production means that the USA can wreak havoc in other oil producing regions, without suffering as much damage to their own economy as would be the case when the USA is an importer. The real economic burden of political chaos in energy producing regions would fall on Japan, SK, China, India, and W. Europe, not on the USA. Briefly put, high domestic production makes it easier for the USA to pursue destabilizing imperial policies. Frack oil and print money at home, while blowing people up and breaking up countries almost everywhere else–there’s the imperial policy in a nutshell.
3. The heaviest collateral damage from the current oil prcie war is suffered by a country like Canada, which is a high cost oil producer but not a world reserve currency producer!
4. Even as EROEI goes down, don’t underestimate the ability of a ruling oligarchy to force other people to eat a lot of pain. All sorts of things can be sustainable for a long time when the benefits are distributed very narrowly and the costs are distributed very widely. Historically, that has been the default way for human societies to deal with all kinds of resource scarcity.
Halliburton’s promotion of fracking which is now done throughout the Anglosphere has been a game changer but is it really the case that those producers and the Alberta tarsands producers are hurting? I thought all this exploratory gambling was done on borrowed money and it was the funds and banks that are actually exposed to ruin.
Is that hitting too close to the heart of western power?
The oil producers’ coco bonds cannot pay their way. Article says that is $1.3t. Several famous names are mentioned – guys who last time demanded and got public relief. Its beginning to look like deja vu particularly if the OPEC countries are withdrawing investments from London and Wall Street to pay bills at home.
Daniel Yergin is the chap who presented “The Commanding Heights” many years ago – three hours of persuasive viewing that concluded the new rules of capitalism were here to stay. Can he have got it wrong again?
I was thinking back to November 2014, around when the Saudis made their decision not to curtail production to support prices, and came upon these themes:
https://www.whitehouse.gov/the-press-office/2014/11/16/fact-sheet-g-20-brisbane-summit
http://www.bloomberg.com/news/articles/2016-03-09/death-of-a-shale-man-the-final-days-of-aubrey-mcclendon
http://www.ft.com/cms/s/0/0b853762-b846-11e4-86bb-00144feab7de.html
http://www.federalreserve.gov/SECRS/2015/April/20150410/R-1479/R-1479_031715_129912_566953355495_1.pdf
Banks had just about completed their exit from the commodities business. How much of the oil price had become financialized? Suppose it discovered there was some sort of massive risk embedded in the oil market? What would it be worth to have the Saudis force an inventory, have it all pumped out into the open, examined, then into storage, mixed with ‘animal spirits’ until inflation is up to a nice bubbling simmer just like the Fed likes it?
Yamani got kicked out of Saud’s hold on Opec oil when Reagan’s cold war strategy required that King Fahd open the Saudi tap full blast to “weaponise” falling oil prices, in his brinkmanship against the evil empire of Brezhnevian USSR.
Fahd complied and the resultant oil price collapse –albeit aided by new finds like Cantarell’s giant Mexican field and Prudhoe Bay– felled the Soviets.
Yamani opposed that “weaponisation” strategy as his vision was that the “swing” producer should be more responsible and not impose undue hardship on all the OPEC producers; of which Yamani was spokeman since 1974.
Yamani got dumped as “collateral damage” to that Imperial command.
Reagan and Fahd were closer than his predecessors and King Faisal who was more “independent” relative to US dictats.
Its nice to see Yamani becoming an early herald of “alternative” energies and signalling the fall of King Oil !