Friday, September 18, 2015

Peak? What Peak? Wasn't shale oil supposed to give us a century of prosperity?



Image courtesy of Jean Laherrere

7 comments:

  1. This is where I get confused. There are a number of factors that are causing the drop in tight oil production, obviously the drop in crude prices driven by overproduction, new countries coming back on the market and recession/fear of recession/financial turmoil. You can have all three of those factors without feeling the effects of peak oil

    My understanding is that the cost of tight oil extraction is higher than current market prices, so economic decisions are forcing operators to take their oil off the market. That does not mean that the oil isn't still there or that it won't be extracted later -- when oil prices go back up.

    I don't think this drop off can be explained by the concern that these wells are going to dry up faster than the optimists are projecting, or that the economics of the situation don't add up (the concern that the cost of drilling more and more wells to make up for the ones that go dry will put pressure on financing). My understand of US business and investment, tight oil isn't going away. We've just hit the pause button. Sure, some investors got hammered, but they'll be back, and the engineers are still working on ways of getting it out cheaper and easier.

    It also seems as though the cost of producing tight oil isn't so high that using it will force the global or western economy into recession or decline. It's just sitting there waiting for prices to go back up, as is the money required to extract it.

    Meanwhile, in the US, consumers are partying like it's 1990. We're buying more cars and we're buying bigger cars and lots and lots of trucks and SUVs. Tight oil may not give us a century of prosperity, but the rednecks are thrilled.

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    1. Everyone is confused, James. This is an extremely complex subject for which we have little reliable data, except in terms of production ones.

      In any case, my impression is that managing the extractive system is a little like steering a transatlantic liner. Note how the drop in oil prices started about one year ago, but production kept going up. It only started to go down a few months ago. Now, if prices rise up again, it will not return to growth right away. These things don't happen just because someone presses a button. To rebuild the shattered shale oil industry, we would need a number of years of high prices sufficient large to convince investors to put back their money into it. And they would have to do it after that many of them lost their shirts just in this idea.

      So, really, the future is obscure, but it has a pattern. And I think the pattern is down, give or take a few years.

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    2. "That does not mean that the oil isn't still there or that it won't be extracted later -- when oil prices go back up."-J

      The only way Oil Prices can go back up is if the end consumer has credit to buy and burn the oil. The opposite is occuring, the end consumer is being triaged off the credit stream. More job layoffs (Hewlett Packard just announced a big one), most countries in europe under some level of austerity and the Chinese construction bubble has popped. So even with diminished production you're still going to have a glut of oil being produced for quite some time.

      An extreme supply disruption (like say Ghanwar was hit by Ruskie missiles fired from Iran) would raise prices, but then you would start to see real shortages and disruption of BAU in general.

      Although the price may bounce around some, barring extreme events it will keep going downward until most of the extractors go out of biz and credit dries up to keep them running. According to BW Hill's ETP analysis, by about 2020 the price will be down to around $12/bbl and most of the industry will be outta biz.

      RE

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  2. I would only add one small thing. Having lived through various Internet boom-bust cycles, it seems as though high risk, high return investing is something Americans do well. And there is a lot of capital looking for high returns. Sure, some people get crushed, but my guess is that the capital is just on the sidelines, biding its time, and waiting for energy prices to start going back up -- which they will at some point.

    haha. That is why I think that climate change is going to get us before peak oil does.

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  3. James, your confusion is based upon an incomplete consideration of the fundamentals of tight oil (and gas) production.

    At its core is the influence of depletion rates. When a new well's production drops off 50% after the first year or so of production and has less than a decade of life expectancy, producing tight oil becomes a treadmill in which an exponential increase in drilling rates is necessary just to maintain a given level of output. This pattern is exacerbated at the field level by the pattern of drilling the most promising locations first, thus exponentially increasing the cost of drilling as time goes on and new individual wells are less likely to be good producers.

    The end result is that capital costs are the driving factor that determines whether tight oil can ever be profitable, and the slightest movement upward has a highly leveraged impact upon what price would be necessary for the industry to revive. The entire tight oil & gas bonanza is a product of near zero interest rates for the favored few with access to the casino chips printed by the FED and other national central banks. A return to anything resembling market pricing of capital will be the nail in the coffin of the tight oil/gas Ponzi. (See Chesapeake Energy for an example of the basic business model)

    With a world financial system based upon suppression of market pricing and manipulation by central banks determined to manage the system to enrich the already filthy rich, I'd put financial collapse in the lead ahead of peak oil and climate change in the race between the Three Horsemen of the Apocalypse.

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    1. Fully agree. The shale oil boom has been fueled by zero interest rate money . The oil companies collateralize their revenue stream and borrow ever more cheap money against it issuing ever more junk bonds (sovereign debt yields next to nothing so "investors" are "hungry for yield" and are willing to buy them) so they can obtain the cash to keep on drilling and stay on the treadmill. Yet another reason why the Fed predictably did NOT raise rates even by 25 basis points. Even just that would have killed that gig. The shale oil boom is yet another example of the distortion of markets (abolition would be a better word than distortion) and the grotesque malinvestment caused by 80 months at zero interest rates and three rounds of QE with a fouth one on the way, no matter what the fake inflation and unemployment data will show. The Fed and all the other central banks that have aligned themselves with the same policies and coordinate with it, now have no way out. Sixty trillions of extra debt have been added since 2008 to the world total which inow stands at 200 trillions for a world GDP of 65 trillions. U.S. Shale Oil is one example of what is being kept afloat by cheap money, Chinese Ghost Cities is another (indirectly keeping afloat the rest of the world economy over the past few years) and the European Union is a third example since without massive ECB purchases of Italian, Spanish, French and other sovereign debt interest rates for all those countries wou.ld quickly reach their market rates (i.e go through the roof) promptly creating immense fiscal deficits and bankrupting those countries. And then bye bye European Union. We now live in a Central Banks managed world worse than Soviet Central planning. Some of the same things will end up bringing it down as brought down the Soviet system, energy being one. And the aftermath of the world collapse is likely to look similar too namely corrupt oligarchs everywhere scooping up real assets for pennies on the dollar. Maybe that's the real game plan?

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  4. I would like to add some other points to my above comment which might have left the impression that I am a strong believer in free markets. I do believe that free markets are the only way to run a capitalist system but if and only if sufficiently robust and effective legal, regulatory, and institunial systems and frameworks also are put in place to address the four or five main areas of market failure and externalities while also addressing inequality through appropriate policies and while also limiting economic growth and maximizing efficiency to what is sustainable. However I think the current world globalized capitalist system is now so grotesquely indebted and so beyond limits to growth and the carrying capacity of the planet and so dependent on fossil fuels and vast amounts of ever more depleted, degraded or more expensive resources that it will almost certainly collapse and the far too large human population with it. If humanity ever recovers in its new and thoroughly degraded and far less hospitable new environment including also populated by far fewer other essential species and far hotter and far more polluted and with far more difficult to secure resources, it probably should try to avoid setting up a new capitalist system and certainly avoid one based on perpetual population and economic growth. Such a system would require new and radically different political, territorial & populations governance, economic, cultural and social institutions of both the macro and micro and the formal and informal varieties. I think the problem humanity now faces is in final analysis neither a resources crisis, nor climate change and pollution and all their myriad attendant problems (even though these -given humanity's current institutions and systems - have now become so serious and ubiquitous as to make the enormous institutional transformation indicated above as required to address and not further aggravate these problems and instead achieve survival and sustainability, nearly impossible)...the fundamental driving problem is in fact humanity and the interactive institutions and systems which together holistically govern its collective behavior both within human society and its different parts and between human society as a whole and its planetary biophysical habitat..from private property, the patriarchal family and the state to all the other political, economic, religious, cultural and social institutions, customs, traditions and interactive systems that have been created,, built up and have then further evolved and adapted over time as human society grew ever larger and far more complex throughout its recent and longer term histories. I apologize for this additional comment which may not interest some since it has even less to do with shale oil than my earlier one but which I hope might be somewhat interesting and relevant anyway in its attempt to briefly describe the broader and longer term context.

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Who

Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014)