Eagle Ford Update


Figure 1

 This was also posted at Peak Oil Climate and Sustainability

It has been a while since I have updated my estimate of actual output from the Eagle Ford.

Kevin Carter (KC at Peak Oil Barrel) graciously offered help pulling together data for the 39 fields which make up the Eagle Ford play (see this page at the RRC of TX, spreadsheet download here .)
Kevin has strong programming skills in Visual Basic for Applications (VBA) and has made the job of gathering the Eagle Ford data considerably easier.  Thank you Kevin!

My previous estimates only included the Eagleville fields (Eagle Ford 1 and Eagle Ford 2 and the inactive Eagle Ford and Eagle Ford Sour fields), Briscoe Ranch, Sugarkane, Dewitt, Gates Ranch, Hawkville, and Eagle Ridge fields.  Together these 10 fields produce about 99% of Eagle Ford C+C output so these previous estimates are not bad, this new estimate includes all Eagle Ford output reported by the RRC from June 1993 to January 2014.

Note that from June 1993 to Dec 2006 C+C monthly output from the Eagle Ford play was 12 b/d or less, which is why the chart starts at Jan 2007.

An Excel spreadsheet with the data can be downloaded here .  More below the fold.

A brief explanation of the EF EIA curve (red line on the chart) is in order.

I downloaded EF RRC data and statewide TX RRC date from the Railroad Commission of Texas (RRC of TX),  then I found the percentage of all TX C+C which is produced in the Eagle Ford play.

In January 2014 Eagle Ford C+C was 943 kb/d (RRC data) and TX C+C was 2259 kb/d (RRC data) so 42% of TX C+C was produced in the Eagle Ford according to the RRC of TX.

Historically EIA estimates of TX C+C for the most recent 12 months have been much more accurate than data reported by the RRC of TX (see figure 2 below), so I use the TX C+C reported by the EIA (2874 kb/d in Jan 2014) and assume the % of output from the Eagle Ford based on RRC data is fairly close (it really is the best we can do, we have no other data).



Figure 2


Spreadsheet with past RRC data downloaded at different dates in the past can be downloaded here.

The EF EIA estimate is the TX EIA C+C multiplied by the %EF/TX(42% in Jan 2014) from RRC data.  In this case EF EIA=0.4175 times 2874=1200 kb/d in Jan 2014.

A final note is that although past estimates have proven conservative (Sept 2013 estimate for June 2013 was 998 kb/d vs. April 2014 estimate for June 2013 of 1024 kb/d), at some point the rapid increase in Eagle Ford output will slow down.   We can only speculate as to when that will occur, but when it does, this method of estimating Eagle Ford C+C output may prove too optimistic.

The EIA estimate of TX C+C has been a simple linear extrapolation of the past trend, this method has worked pretty well over the past 12 months, but there is no reason to expect that a linear increase in Texas oil output will continue indefinitely.

My modelling (which is speculative) suggests about 6 Gb for a URR for the Eagle Ford with a decrease in new well EUR to begin in July 2014 and to gradually increase in rate from a flat new well EUR (no decrease in new well EUR) from 2010 to June 2014 (EUR30=200 kb over that period) to a 16.6% annual rate of decrease in new well EUR by Jan 2016.  Using the economic assumptions below we get the chart that follows for Eagle Ford output.

Real well cost Oil Price
(2013$) (2013$)










Ann. Discount Rate


Royalties + Taxes


Transport Cost $3/barrel
OPEX $4/barrel



 Figure 3

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203 Responses to Eagle Ford Update

  1. Oil price in 2030 at $244 a barrel in 2013 dollars? Impossible. The economy would fall flat on it’s face long before the price of oil ever got that high.

    Gail Tverberg has been thrashing this straw for years, and she is absolutely correct. She lays out the reaons, and there are many reason, that when oil prices get so high the government goes into a tailspin. It did just that in 2008 when prices reached $144 a barrel (in 2008 dollars). I don’t think it could get even that high again without a serious recession. After all we are currently feeling the effects of $100+ oil today. True unemployment is the highest it has been since the great recession.

    How High Oil Prices Lead to Recession

    There is ample evidence that spikes in oil prices leads to recession, at least in the US, which is an oil-importing nation. James Hamilton has shown that 10 out of the last 11 US recessions were associated with oil price spikes….

    This article, one of many Gail has written on the subject, lays it out in plain language.

    Bottom line, there is a limit as to how high oil prices can go without sending most of the world’s economies into a tailspin. And $244 a barrel is way, way above that limit.

    • Frugal says:

      Oil price in 2030 at $244 a barrel in 2013 dollars? Impossible.

      I read somewhere that the average profit per airline passenger is around $4, so $200+ a barrel oil would likely kill off most of the air travel in world. And what would happen to the manufacturers of gas guzzlers, power boats, RVs, airliners, …. Probably also all gone. Ron’s right, the economy as we know it today would tank.

      • The economy will simply not be as we know it. Which bits adapt, mutate, change, or even revert is the really interesting question; for example will air travel go back to being an expensive luxury like I remember it in the 1960s? I suspect at the very least this will happen, flying is just too useful and we are likely to use diminishing FF liquids for this over driving the kids to school. I have have been frankly amazed at airlines ability to deal with $100 oil. Hurting profit wise, certainly, but I’m pretty sure Gail was saying that airline travel would be all over at 100 when it was around 20…? It is hard to remember just how unimaginable $100 was just a few years ago. So normal now. Necessity the Mother…. etc

        Everything will change; we are witnessing the twilight of the great motoring age, but still it’s already shown greater persistence than i thought possible. And it is easy to miss big changes in their early stages; spatial shifts; the beginnings of the crash of auto-dependant sprawlburbia is visible if you look, renewables are just beginning to scale up, walking, cycling, transit use, is all growth this century.

        These forces of structural adaptation are currently held in check by the pressure of inertia, vested interest, shear habit, and imagination deficit. But tipping points will occur; and the price of liquid fuels is surely a big one. Sadly the MSM will call these; ‘shocks’. And they will be to both the system and all those who swallow the BAU lie.

        Collapse is a form of change [viewed dispassionately]. There will be many many collapses; there always are. Grand Collapses, ie of everything, everywhere, are very rare. Peak Oil [which we are experiencing now] won’t do it in my view, but will force the change of everything from what was experienced in the West as normal last century.

        Climate Change? Probably. Climate Change looks more like a global version of earlier more local collapse experiences like the Black Death. Local events that felt universal to those suffering them. I expect major population down-sizing to occur this century. They are already underway quietly in the deflating Old Worlds of Japan and Europe, but they’ll be more sudden and much more horrible in more vulnerable parts of the overpopulated tropical regions. Famine, war, epidemic, death… the Four Horsemen basically. But they’re always there; just waiting….

      • 4/3/2014
        The end of airlines – predicted by no other than former Qantas CEO Geoff Dixon in July 2008

        Despite growth in passenger numbers Virgin Australia can’t make money since 2009

        • Frugal says:

          The struggles of Australian airlines over the last few years are likely a direct result of higher fuel costs. And there’s hardly any other way of entering or leaving Australia except by air travel, unless of course, ocean liners make a concerted come back.

          And the Australian airline woes are hardly unique, just look at Malaysian Airlines for example.

          I’d say the first casualty of peak oil will be tourism.

    • SuddenDebt says:

      What would the (oil) demand look like with oil at $244/bbl ($2013) in 2030?
      And how much more debt would sovereigns and consumers have to add to afford $244/bbl oil?

      • Watcher says:

        Doesn’t have to be $244 if you don’t want it to be. Economics is not a law of nature.

        The Federal Reserve can decree the dollar to mean something other than 1/244th barrel.

        • Frugal says:

          I never really did figure out this infinite debt thing. Very likely, most of the Word’s debt will never be paid off except with even more debt and/or hyperinflation.

          Essentially, more and more debt means larger and larger overlapping IOUs. Can this really keep going on forever without any real consequences?

          At some point massive default will take place, which will mean huge losses for lender/savers. But what about the borrowers? Are they going to be big winners in this scenario? After observing Greece, I think not.

          So everybody will lose.

  2. Coolreit says:


    Thank you for your contribution to Ron’s excellent site.

    Why do you think the cost of drilling an Eagleford well will decline by $1.8 million in 3 years to Feb. 2016? Given the Fed’s continued money printing of $55 billion/month down from an earlier $85 billion, I think the cost to drill a well would rise not fall.

    If the cost to drill an Eagleford (EF) well stayed the same, how would that affect your chart? Would peak EF still be late 2015? When would peak be if the cost to drill an EF well rose by 20% in the intervening three forecasted years to Feb. 2016?

  3. Political Economist says:

    Ron, another excellent post! I’ve a question for royalties and taxes. In your model, you assume those to be 24%. Is that % of real well cost or oil price? And what depreciation rate do you assume, or is that under operation and management?

    Compared to your model, I’ve a relatively curde method to estiamte the next peak of Texas oil production. As the Texas oil production started to take off after 2010. In 2010, the lowest monthly production happened in February when the total monthly production was about 31,400 thousand barrels (a daily production of about 1.1 million barrels).

    I call 30,000 barrels per month as the “normal” production level and call the difference between the actual montly production level and the “normal” monthly production level the “excess” monthly production level. Then I calculate the cumulative “excess” production starting from January 2008 and then for each month I can calculate the ratio of current “excess” production to cumulative “excess” production. In this way, I can apply Hubbert Linearization to the “excess” production starting from January 2008.

    The graph below shows the HL analysis with regression applied to January 2013 to January 2014 (R-square 0.621). The ultimate “excess” cumulative production is estimated to be 4.2 billion barrels. This is somewhat less than the 5.7 billion barrels you estimated for the ultimately recoverable of Eagle Ford. But HL analysis has a history to underestimate ultimately recoverable resources before the peak happens.

    • Political Economist says:

      The next graph shows the historical and projected Texas oil production. For the historical production, EIA data and RCC data are compared. As Ron explained, after March 2013, EIA assumes a linear growth rate of 48,000 barrels per day. So much of the recent EIA “historical” data is actually projection.

      For projection, the projected “excess” production is added to the “normal” production of 30,000 thousand barrels per month.

      My projection indicates that Texas oil production will peak in February 2015, with a peak production level of 98,400 thousand barrels (about 3.5 million barrels per day). The “excess” oil production (which may be seen as a proxy for Eagle Ford and other shale plays) will peak in the same month with a excess production level of 68,400 thousand barrels (about 2.4 million barrels per day). The peak excess production level is about 1 million barrels per day higher than Ron’s estimated peak for Eagle Ford.

      • Dennis Coyne says:

        Note that some of the TX “excess production” is from the Permian basin, which has increased by about 336 kb/d since 2004 when we look at the decline trend over 1993 to 2004 and assume that excess production is the increase over this underlying trend.

        If we add that and assume another 160 kb/d increase in Permian output (simply a WAG) we would have a peak (if the Eagle Ford and Permian peak happened to coincide) of about 2 MMb/d of “excess” TX output. So this is still a little lower than Political Economists HL analysis. For the Bakken, HL analysis gives a higher and narrower peak than is likely in my view. The same may be true of the “excess” TX HL analysis. Time will tell.

        I have also assumed that drilling in the Eagle Ford will continue at present rates of about 2700 new wells added per year, monthly rate of new wells added for the past 6 months has been about 225/month and 2700/ year assumes the yearly rate will be 225 times 12 months. If this assumption is too conservative and drilling rates ramp up to higher levels (maybe 3000 new wells per year or even 3600 new wells per year) then we would see a higher and narrower peak.

    • BW Hill says:

      Political Economist

      If you are using HL then I assume you are using the equation P/Q = w(1-Q/Qt). How do you derive the growth/decay parameter w?

      • Political Economist says:

        If you know P/Q and Q, then regress P/Q over Q, so you have:

        P/Q = a + b (Q)

        It implies that a = “w”; and b = “-w/Qt”. Since w is already known from a, it implies that:
        Qt = -a/b

    • P.E. You are addressing your question to the wrong person. The above post was Posted by Dennis Coyne.

    • Dennis Coyne says:

      Hi PE,

      My model does not include depreciation, it is a breakeven analysis where the expected Net present value of future real net revenue flows over the life of the well (assumed to be 30 years) needs to be greater than the real cost of the well for the investment to be undertaken. Royalties and taxes are a percentage of wellhead revenue and the real oil price is at the refinery gate. I will create an artificial example to illustrate.

      Assume refinery gate price is $100 per barrel and transport costs are $3/barrel, in that case wellhead revenue is $97/barrel, so royalties and taxes would be $23.28/barrel, add in $4/barrel in OPEX and total costs including taxes and royalties are $30.28 per barrel leaving $69.72/barrel of net revenue in the first month, every future month the net revenue from barrels produced is discounted at an annual rate of 7%, this calculation is performed for the 360 month life of the well using an average well profile that produces 200 kb over the 30 year life of the well.

      A Chart showing how the NPV of the wells change over time as the estimated ultimate recovery (EUR) of the average well will eventually decrease as the sweet spots run out of room. Profit is the NPV minus the cost of the well in real dollars (2013$), all costs and prices and NPV are done in real (inflation adjusted) terms.

      • Dennis Coyne says:

        trying to post chart

        • Political Economist says:

          Dennis, thanks for the detailed explanation. I think what you call “net revenue” is also known as “gross cash flow” or “gross operating surplus” in business accounting.

        • Watcher says:

          7% seems light given

          OPEX inflation
          Royalties and taxes inflation
          transport inflation

          Available return available in equivalent risk instruments for the initial check written, and given that it is financed, where are the financing costs in the curve?

          • Dennis Coyne says:


            That is a real rate. If this had been done in nominal terms the discount rate would have been 10 %=7%+3% inflation.

            • Watcher says:

              Legit answer.

              But that doesn’t address the financing costs on the initial check. Be it internal cost of capital or competing investment vehicles outside the company of equivalent risk, NPV of anything has to compete with alternatives. You gotta slope that line.

              • Dennis Coyne says:

                Hi Watcher,

                The analysis was done on a point forward basis. Much of current investment in wells is funded from cash flow, so the financing costs are negligible. Full cycle costs would be better, but I have basically used the point forward analysis that I have gleaned from Rune Likvern’s analysis of the Bakken. It is not perfect.

                Also keep I mind that there is associated gas produced by most of these wells, the sales from this associated gas will cover some of the financing costs which I have left out of the analysis.

                • Watcher says:

                  Assuming there’s no debt involved as you say, you still have to compete with internal cost of capital and other vehicles.

                  The obvious vehicle example is to share buyback, like everyone else, and goose EPS that way.

                  You have more work to do.

                  • Dennis Coyne says:

                    Hi Watcher,

                    I don’t know what the ICC is for these firms,
                    I have used higher numbers in the past and it was argued that the discount rate was too high. I agree that 7% might be too low, but it equates to 10% on a nominal basis, what number makes sense to you, in the past some have claimed that a 12% real rate was too high. Are you thinking 15% (nominal basis), higher?

                  • Watcher says:

                    Legit question. Share buybacks have been absurd and are generating double digit returns in stock appreciation.

                    I know it’s absurd to say 20%, but if you are chasing dollars at the company, the day will arrive when the CEO wants to look good to the board, and stock price does that more than barrels/day.

                  • Dennis Coyne says:

                    Hi Watcher,

                    The high stock returns are pretty variable, the typical WACC (weighted average cost of capital) used by industry analysts is 10%, so because I am doing my analysis in “real” terms (which drives you crazy), I think a 13% annual discount rate makes sense.

                    Note that the industry average WACC is about 9% so 12% might work as well so somewhere in the 12 to 13% range makes sense. Thanks for your input.

    • Dennis Coyne says:

      Hi PE,


      In the Chart at the link above notice the decline in TX output from 1981 to 2003 and imagine that trend continuing until 2013. TX “excess” production would be better defined as the production that is greater than that trendline from 2004 to 2013, that way you would be including the increased output from the Permian basin that arrested the decline over the 2003 to 2009 period before the output from the Eagle Ford started to take off. Interesting analysis, but HL(Hubbert Linearization) often gives pretty shaky results when you use 1 year of data(Jan 2013 to Jan 2014), note also that one could choose Jan 2012 to Jan 2014 for the regression and get very different results. The choice is quite arbitrary and is a weakness of the HL technique. I have played around with it quite a bit in the past and have decided it is pretty unreliable especially over very short time frames (less than 10 years of data).

  4. Dennis Coyne says:

    Hi Ron,

    Real oil prices rose by an average annual rate of 12% from 1998 to 2013. My model has prices remaining flat until 2015 and then rising by 6% per year, half as fast as the 1998 to 2013 period where real oil prices roughly tripled.

    I do not agree with Gail’s analysis.

    In 2008 prices rose very quickly and we had a financial crisis which caused the recession, high oil prices were likely a contributing factor.

    Let us assume for a moment that Gail is partially correct that oil price increases are the main reason for the economic downturn. I would argue that it was the rate of increase in prices that was the main problem, real monthly oil prices rose by 77% from August 2007($77.58) to July 2008($137.66) according to the EIA’s real prices viewer http://www.eia.gov/forecasts/steo/realprices/ .

    Also note that the model is easily adjusted to account for lower prices. I disagree that high oil prices cannot happen, if they rise slowly, the economy will adjust, people will buy more fuel efficient cars, ride buses more than planes (and cars) and people will demand more and better public transit. The adjustment will not be painless, but things always change sometimes for the better.

    • In 2008 prices rose very quickly and we had a financial crisis which caused the recession, high oil prices were likely a contributing factor.

      It’s the boiling frog metaphor. The temperature of the water rose so slow the frog didn’t notice. But the frog died nevertheless.

      Ditto for the economy. It really doesn’t matter how slow the price rises, the effect will be the same. Yes the economy does adjust. But the very same effect just happens slower. If your income drops by 4% per year, you adjust. But after twenty years you will still find you are buying a lot less, going out to dinner a lot less, buying old used cars instead of a new one, and basically spending a lot less money than you once did. The effect on your life will be the same regardless of the speed your income dropped.

      If disaster happens very slowly the end result is the same. Did the K/T extinction happen very quickly or did it take millions of years? It doesn’t matter, the dinosaurs are still dead.

      And I do agree with Gail’s analysis. But if you disagree you need to explain why and where she is wrong.

      • Dennis Coyne says:

        Hi Ron,

        There are a number of problems with Gail’s analysis.

        Correlation is not causation.

        In the chart below she seems to be indicating that there is a correlation between GDP growth and energy growth, and I agree there is a correlation. The cause of reduced energy growth may be lower income growth she has cause and effect reversed or there is no specific cause that can be identified for the slowdown in GDP.

        There are many countries with much higher fuel costs than the US, why aren’t they doing very poorly? Prices were on the rise from 1998 to 2007 from $17.47 in 1998 (annual avg real oil price) to $76.46 in 2007 more than a quadrupling in oil prices and an 18% average annual rise in prices over that period. The rate of increase in annual GDP over that period was 2.7%.

        And Ron we often do not agree, just because you are convinced by Gail’s arguments does not mean that everyone is. A 2009 blog post by Professor Hamilton


        suggests that economic growth was very fast and the world oil supply did not keep up.
        Simple supply and demand arguments can explain the rapid rise in price.

        He does not say that the high prices caused the recession which followed this rise in prices only that the recession resulted in reduced demand for oil and a collapse in prices.

        I will need time to digest his longer paper. So far, based on his blog post, Gail is reading more into Hamilton’s paper than he would have intended.

        • And Ron we often do not agree, just because you are convinced by Gail’s arguments does not mean that everyone is.

          Damn! You could have fooled me. I thought that when I was convinced that meant everyone else was also convinced.

          The argument that oil prices are much higher in Europe and it is not causing a recession there is a very poor argument. First that and other things are causing a recession in about five or so European countries. Second their economy is set up to run on higher prices. Their cars are much smaller, their haul distance is much shorter and the higher petrol prices go to taxes which are returned to the public in the form of benefits like free medical care and other freebies that we don’t get here. Higher oil prices make us all suffer alike.

          He does not say that the high prices caused the recession which followed this rise in prices only that the recession resulted in reduced demand for oil and a collapse in prices.

          Oil shocks and economic recessions by James_Hamilton.

          I’ve just completed a new research paper that surveys the history of the oil industry with a particular focus on the events associated with significant changes in the price of oil. Here I report the paper’s summary of oil market disruptions and economic downturns since the Second World War. Every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession…

          The correlation between oil shocks and economic recessions appears to be too strong to be just a coincidence (Hamilton, 1983a, 1985)

          If you read this whole paper, and especially if you read the research paper (linked) I think you will get a better understanding of what Dr. Hamilton is saying. And he goes to really great lengths to show that high oil prices does indeed cause recessions.

          • SRSrocco says:

            I thought we all watched Steve Kopits presentation on the Supply Constraint Model. He proved the market responds negatively to high priced oil.


            • SuddenDebt says:

              That is from linear thinking.
              How would the market react to complex non linear dynamics?

              Panic? 😉

          • Watcher says:

            Gail is an actuary. She believes in money.

            I suspect she’s not right either, but in the other direction of Coyne guy.

            Real doesn’t mean anything if you do the calculation using domestic CPI or even GDP’s IPD. With rampant QE globally, and the correctly applied number to generate “REAL” being pretty much unknown (since all CPIs are computed using each nation’s own form of deception) you can’t do the computation in money. Money isn’t physics. It was invented, and it changes its nature whenever someone wants it to. Think the Germans let the French pay for the cost of their own conquest in Francs?

            That BW guy was quoting BTUs to drill and that is headed in the right direction, if we can get details, and BW . . . if you reply that it’s proprietary that will be a legitmate reply, though disappointing.

            • Dennis Coyne says:

              Check http://bpp.mit.edu/usa/

              No government manipulation involved.

              • Watcher says:

                I went thru that link carefully.

                Not remotely reassuring.

                Their goal is to note direction of trend and they explicitly say they do not have a goal to specify an accurate number per month, though they do for the sake one supposes of sanity (if not future revenue).

                BLS has a budget. They have money and people. And they have a process that samples huge numbers of HOUSEHOLDS (not website ads only) to determine the constituent portion a given sector of expenditure represents of the whole. If households say food is 15% of spending, then that’s how they weight food. There is NO similar procedure noted by these price stat people. They don’t talk about how they weight, and thus how can one be reassured by their methodology? They very probably waved their hands in the air and invented some correlation coefficients to make their results look close to CPI (which is what we distrust to begin with).

                There is no reassurance here.

                  • Watcher says:

                    What does a Nobel Prize for Peace awarded a month or two into a term mean?

                  • Watcher says:

                    BTW he didn’t seem to like the absence of service sampling.

                    Regardless of all of this, if they don’t make the phone calls and take the samples, all they are doing is regressing uncorrelated numbers against BLS samples that WERE taken and then manufacturing a correlation coefficient to make themselves look good.

                    There is, on the other side of the spectrum, the much ballyhooed John Williams’ Shadowstats site that produces an estimate that is well supported BUT ALSO lacks the staff and budget to MAKE THE PHONE CALLS and take the measurements, so whereas the anti CPI wackos like to worship at his altar, I’ll sneer at him too for lack of budget.

                  • Dennis Coyne says:

                    Hi Watcher,

                    I was talking about Krugman’s nobel prize not Obama’s.

                    I think the CPI numbers are the best we have, so we may be in agreement. I disagree that the Shadowstats is well supported, the basket of goods changes over time which is reflected in the CPI but not in Shadowstats.

                  • Watcher says:

                    I will note you also celebrate real pricing for Brent — which means currency exchange factors are not being addressed, and this is well beyond any sort of imaginary global CPI.

                    The BOJ has QEed far more than the Fed as a % of GDP, and the ECB has obfuscated all of it’s QE equivalence via swaps and rehypothecation. You just don’t have a leg to stand on quoting “real” prices for Brent. You’re applying US centric CPI adjustments to a product largely demanded and consumed outside the US.

          • Dennis Coyne says:

            Hi Ron,

            You are correct that Hamilton argues that a rise in oil prices is associated with recessions. My guess is that the story basically goes like this.
            Oil prices rise leading to general rise in inflation. Then the Fed raises interest rates to get inflation under control and this leads to a recession as higher interest rates lead to lower borrowing by businesses for investment in factories and equipment as well as less borrowing for homes and cars.

            If we have a scenario where oil prices rise gradually (2 or 3% per year rather than the 6% I used in my model) we might not see inflation rise too much (more than 4%) and if the Fed acts it would be moderate action that might not send the economy down the drain.

            Alternative scenario with no rise in prices near the end of the comments.

        • Political Economist says:

          Dennis, the fact that gaps between oil demand and supply drove up oil prices does not rule out the possibility that high oil price caused the global economic recession.

          If supply cannot catch up with demand, high oil price would be necessary to bring down demand so that it is balanced by supply. Ideally, high oil price can encourage substitution and efficiency, so that oil demand can come down without decline of income. But if susbsitution/efficiency is insufficient (especially in the short run), then high oil price can balance demand and supply by lowering income (that is, recession) and lower oil demand would be a by-product of lower income.

          • Dennis Coyne says:

            Hi PE,

            I agree high commodity prices can contiribute to a recession. The notion that high oil prices necessarily lead to recession though a possibility, is far from proven, there are many economists who disagree with Professor Hamilton on this point.

      • Old farmer mac says:

        Personally I don’t think the economy can adapt to 244 dollar a barrel oil in only sixteen years but I do think that there is a very real possibility oil may cost that much in 2014 money by 2030.

        We would be using a whole lot less per capita of course and the balancing of the books would come thru reduced living standards especially in terms of personal mobility, air travel, and other oil intensive activities.

        But it is not impossible that we could adapt.

        It is quite possible to build gasoline fueled cars that get a hundred miles per gallon- such cars are sort of odd looking and very small and slow by current standards but I could build one myself in my own shop given time and materials. The technology is off the shelf now.

        I believe that the odds are extremely good that the battery industry will be able to manufacture batteries by then as cheap as we manufacture engines and transmissions today and an electric motor is very cheap to build.Most people will probably either own or wish they owned a small electric car for their day to day needs unless they live where mass transit is adequate.A lot of mass transit is going to get built.

        Few people realize it but big diesel engines of the type used to propel ships can run on powdered coal. And given the economies of scale and the efficiency of modern turbines it would be easy to build large ships powered by coal running steam turbines driving the ship.

        In times past there wasn’t really room on a ship for such power plants but ships are much bigger these days and the bigger they get the less power they need per ton of displacement.

        We can easily live without all the throwaway junk we make out of oil.

        And we can electrify a lot of transport especially trains which will take the place of all long distance trucking.

        It is probably possible to live with 200 plus oil and live ok fifteen or twenty years from now.

        But I don’t think we will be proactive enough to manage the transition to super expensive oil with the consequences eventually including a major economic crash.

        I have great respect for the Invisible Hand and what it can accomplish but it needs time to work it’s miracles and the market is not going to send the ” get off oil ” price signal soon enough for innovation to create solutions and allow them to be ramped up.

        By the time the price of oil is really and truly murdering the economy it will be too late to break the oil habit and so it is going to break us.

      • Anonymous says:

        I am just back from Cyprus. Small mediteranian island, backward economy, mostly tourism. Joined the EU, got massive loans, modernised, cars everywhere in a few short years. Went broke, bail out, big price rises, austerity. Now there are still cars everywhere, but a signifant number are clearly not used at all. Abandoned on the streets, not old clunkers. Newish cars that the owners can no longer afford to use. Months of dirt on the screens. Not stolen or vandalised. Why bother? Supply exceeds demand. Still plenty of gas guzzlers and luxury brands being driven. Collapse hits the rich last.

        • Watcher says:

          Drive around rural US neighborhoods and you see this effect with empty houses.

          BTW, the EU bankrupted Cyprus, and one might say intentionally. Those Greek bonds that the EU mandated to haircut were hugely owned by Cyprus banks (that were storing Russian money).

          So because of the EU edict that those who loaned money to Greece were going to lose that money AND be denied the ability to declare default (thus triggering swaps) those Cyprus banks instantly were smashed. Then the EU and IMF swooped in to loan huge amounts of money to the Cyprus institutions and keep the wheels turning in society, while ensuring they would be slaves forever. It does appear, though, that the Russian money escaped during a particular weekend before the EU could grab it.

          So we have billions in loans that defaulted, but the ability to declare that default and collect on swap insurance, thereby accessing the risk protection bought was denied — by decree.

          Money means nothing. It can be adjusted whimsically. If millions will die, you adjust it. But for God’s sake, don’t do computations relevant to physics using it.

    • There is certainly confusion about real and nominal fuel prices going forward, it’s easy to say, “So-and-so is wrong!” It’s hard to figure out, but first of all, real prices are high and going higher and there is no way around it.

      Dennis Coyne’s 2033 suggested real price represents 2014 purchasing power multiplied approximately 150% which is likely an understatement. His original trace of 12% increase in the marginal price year-over-year since 1998 is probably an under-estimation going forward as tighter and more extreme fields are exhausted and are shut in = depletion ramps. Wells w/ long laterals, offshore or poorly accessible locations cannot be turned into stripper wells. This leaves out the tight formations which also produce for short periods then are shut in. Stripper wells = 10% US production (that number sticks in the mind).

      Coyne’s costs are fixed by geology, in fact the ‘real oil price’ should be called ‘marginal aggregated petroleum industry cost basis’. This is the purchasing power cost of each replacement barrel of oil, each year. Keep in mind, the nominal cost of each new barrel might be $2,500 or $2.50 but this means is that legacy costs have been ‘adjusted’ onto unsuspecting 3d parties elsewhere, it also does not reflect or question the ability of customers to meet even the lowest nominal costs. Persons who are broke cannot afford even fifteen-cent per gallon gasoline: the driller and his customer at any given time use the same dollar.

      When the real costs are 200% higher than present, the only way to meet them is for other segments of the economy to be deprived of purchasing power. It cannot be otherwise, or the matter of fuel depletion would become meaningless; we cannot have an oil shortage and no oil shortage at the same time! Instead, price rationing works. Accompanying the diversion of funds there is bankruptcy in the non-fuel segments as they are deprived of credit flowing instead to the drillers; at some point the deprivation in the balance of the economy adversely affects the drillers; there are no more barrels, marginal or otherwise.

      This is actually the price point we are very close to right now; where both the driller and his customer are underwater, where neither can afford the other, where neither can afford to do without the other.

      More telling than the difficulties of Greece or Spain (or Egypt or Japan) are the difficulties of Exxon-Mobil and Shell. Marginal costs are too high for even the industry itself to bear. The big problem of course, is that 100 + years and we never figured out what to do with our petroleum other than burn it up for fun. A trillion barrels of the lightest and finest sweet crude and what we have to show for them is a corroding fleet of dented junkers, potholed roads and freeways, poison gases cycling in the atmosphere like avenging demons and billions of hungry, angry mouths. What a catastrophic failure of the imagination! Now, the consequences are lurking at our feet.

    • Ablokeimet says:

      Yes, it is the rapid rise in prices which brought on the 2008 recession (though indirectly – I believe the mechanism was the fact that people stopped buying in the outer suburbs of large cities in order not to spend a fortune on commuting, thereby stopping the Ponzi game in residential real estate and sending masses of CDOs into a death spiral).

      In the real world, however, the market price of a liquid asset rarely moves steadily. It never moves steadily unless it’s not watched closely. For closely watched commodities, speculators dominate the trading volumes and price movements are determined by herd behaviour. The price undershoots and overshoots as the market over-reacts to new information. Fortunes are won and lost on the basis of attempting to be “the second last fool”. The only reason oil prices moved relatively regularly in the late 1990s is that there were many fewer people watching it than did so later on.

      As Peak Oil bites, therefore, we can expect a price spike rather than a gradual squeeze. When the market as a whole realises that the Arabian peninsula isn’t floating on oil and that production is going to be rolling relentlessly lower with each succeeding year, existing oil will be re-valued. At that point, speculators will attempt to work out its value at some point (which they find relevant) in the future and make their decisions today on that basis. The result will be that assumed future prices will be capitalised into current prices. There will be the mother of all price spikes.

      And then the current economy will be sent into a tail-spin.

      • Jeffrey J. Brown says:

        For what it’s worth, since the 1998 to 1999 year over year oil price decline, we have so far not seen less than a 12%/year rate of increase in trough prices, i.e., the rate of change in prices between successive annual price declines.

        Year Over Year Declines in Annual Brent Crude Oil Prices, 1997 to 2013

        1997: $19
        1998: $13

        2000: $29
        2001: $24 (1998 to 2001 rate of change: +20%/year)

        2008: $97
        2009: $62 (2001 to 2009 rate of change: +12%/year)

        2012: $112
        2013: $108 (2009 to 2013 rate of change: +14%/year)

        The long term 15 year 1998 to 2013 rate of change in trough prices would also be 14%/year ($13 to $108).

    • SuddenDebt says:

      I would be careful about using the trend for a specific time frame and extrapolate it to justify the continuation of that trend.
      Since 2012 oil prices in nominal terms have had a downward trend.
      Most consumers now see their real wages decline and do not have the capacity to assume more debt to pay for higher priced oil.

      • Dennis Coyne says:

        Hi Suddendebt,

        I have assumed that oil prices will go up when peak oil hits, we can assume they go down as well, the lower they are, the less oil is produced. I am trying not to make the scenarios too pessimistic. Any future price chart is speculation. The EIA’s AEO 2014 predicts $141/barrel for Brent in 2040 in 2012$ in their reference case.

        I could simulate this with $99/barrel from 2014 to 2021 for Brent crude followed by a 1.88% annual increase in the real price out to 2040 where real prices would be $141/barrel in 2012 $. Also I did a scenario with prices at $100/barrel in 2013$ from 2014 to 2050 below.

    • SuddenDebt says:

      Demand is not what one wants, but what one is able to pay for.
      If consumers cannot pay for products derived from $20/bbl oil, then $20/bbl is too high.

      • Watcher says:

        In the world of economics, consumption and demand are the same thing. If you demand it you pay for it. No such thing as too high. You take money from elsewhere in your corporate budget allocation to pay for it.

        Consumption departs from demand only in the non economic world where supply is insufficient.

        Economics has a solution for that, too. The price rises so that supply appears.

        They are right geologically, too. If the price was high enough, you convert natural gas to oil and presto, supply. Joules limits don’t apply to economics.

        What economics doesn’t have is an answer to is step function elasticity. If price rises and supply doesn’t, then you raise it more, and supply may still not respond. Then you raise it even more and supply may still not respond. Only, perhaps, if you raise it a factor of 10 may there be a supply response, and an X10 step function can be systemically destabilizing.

        • SuddenDebt says:

          But price increases tends to do something to the demand/consumption side of the equation.

          • Watcher says:

            Shrug. It took an X5 to free up some shale. Easy shale.

            Difficult shale in Argentina or Russia may be another X10.

    • Watcher says:


      Using CPI or Implicit Price Deflator?

      • Dennis Coyne says:

        Hi Watcher,

        CPI would be my choice, but it doesn’t really matter, you could use any measure you choose, the EIA uses CPI.

  5. Coolreit says:

    Nice work Political Economist!

    Using your model, when do you forecast Eagleford Peak?

    • Political Economist says:

      Thanks, Coolreit. To project Eagleford peak, I need to have the historical cumulative production data from Eagleford, which I don’t have at this point.

      I should caution that past experience indicates that HL tends to underestimate utlimately recoverable resources. However, by tracking the data we can at least have a sense on what the current trend is pointing to.

      • Dennis Coyne says:

        Hi PE,

        There are many problems with Hubbert Linearization (HL), even with data from 1859 to 1950, the Hubbert linearization under predicts US output by a large margin, trying to get anything meaningful the from a few years of data is not worth the effort in my opinion.

        The Cumulative Eagle Ford output from June 1993 to Dec 2006 was 29.706 kb according to RRC data (June 1993 is as far back as I can go in the database).
        In the post there is a link to Eagle Ford data from Jan 2007 to Jan 2014.
        Should be all that you need.

  6. Euan Mearns says:

    So the EIA and RRC use different algorithms to estimate recent production and both are wrong. The RRC went through a crisis revision between March and September 2013, and revisions still have an 18 month lag. So trying to follow up to the moment developments here is kind of pointless. We kind of know what was going on in July 2012. Any specific reason for the reporting system to be so inefficient?

    Its great work, thanks, E

    PS Ron thanks for explanation of Bakken declines yesterday.

    • Dennis Coyne says:

      Hi Euan,

      Neither the EIA od RRC data are perfect, but in the past the EIA estimates have been far more accurate. Chart below compares TX C+C RRC data from March 2014 with RRC and EIA data from March 2013. Notice how much better the EIA estimate from March 2013 was compared to the RRC data from the same date.

  7. Patrick R says:

    Renewables march on building supply and disrupting current generation and distribution models. Watch for exponential growth from here and squeals of outrage from incumbents:

    Renewables ‘Good business sense’ for new players:



    • FunnelFan says:

      Yep, windmills are great, until they start chopping up birds by the millions. Solar panels are great, until they start frying and incinerating birds by the millions.

      Mankind in the last century has found that using fossil fuels for power is the most efficient and cheapest way to provide electricity for the millions who like a cold beer in their air conditioned home while watching sport on their big screen TV. Take that away from them by making electricity too expensive now for a possible dubious advantage sometime in the future and the greenies will have a revolt on their hands.

      In the meantime, I’ll gladly take fossil fuels over inefficient and expensive renewables any day. But I happen to like my lights to come on by flipping a switch and my car starting by turning the key.

      • Good grief this bird BS is getting insane. Do FF and nuclear systems have no environmental costs and risks?

        Yeah and you no doubt do prefer non intermittent electricity supply, but you’ll adapt quite happily to it when it’s the best that’s on offer. Although I’m pretty sure it won’t come to that directly. Already renewables, even in the Land of the Free, are doing a lot to keep your switches working day and night. Just read those articles. Anyway the transition is happening right now because smart people are making hard headed decisions about both financial and environmental sustainability. You’ll be disappointed to find the conspiracies and insane distortions are for the business as usual structures rather than for some kind of elaborate trick by ‘Greenies’. If you look.

        Price will be the mechanism that gets you to change the fuels you use [although you may not even know it with electricity], if not your prejudices.

        • Jeju-islander says:

          Another irrational argument from a wind hater. The 3rd in the last few days.

          It really is quite easy to look up a factual counter argument – Do wind turbines kill birds?

        • FunnelFan says:

          Its not BS that wind and solar are noted bird killers. Even the leftist US Government is aware and reporting how solar panels are nothing but huge bird fryers.

          “Travelers may be awed by the site of the Ivanpah solar power plant on the drive between Los Angeles and Las Vegas, but get too close and they may find themselves in the midst of an animal “mega-trap” full of scorched birds and insects.

          “It appears that Ivanpah may act as a ‘mega-trap,’ attracting insect-eating birds, which are incapacitated by solar flux injury, thus attracting predators and creating an entire food chain vulnerable to injury and death,” according to a U.S. Fish and Wildlife Service report.

          The FWS report details bird deaths at three solar facilities in southern California — Ivanpah, Desert Sunlight and Genesis. Officials examined the remains of 233 birds and found that “solar flux” was the leading cause of death at Ivanpah. Basically, the birds were incinerated as they flew over the installation, according to the FWS report obtained by KCET.

          FWS reports that 47 of the 141 dead birds found at Ivanpah were essentially burnt up — sometimes whole birds and bugs are even incinerated. Damage to the birds’ feathers ranged from “singeing to charring, and a few instances of skin burns,” reports KCET.”


          • ‘the leftist US Government’: haha so funny. As I live outside of the US I know what actual left wing government looks like, the naivete of the more insular american about politics is breathtaking.

            Also if ‘birdgate’ is your best argument against renewables look forward to being disappointed. It’s the ‘Birther’ of energy source positions.

            • Old farmer mac says:

              People who are opposed to wind and solar power on the basis of bird kill are either woefully ill informed or so hooked on the business as usual kool aid that talking to them is a total waste of time.

              I cannot find a single comment any place by one of them that mentions the loss of birds to picture windows. They don’t talk about coal mines destroying them thru habitat destruction.

              I can’t find comments by them about house cats killing birds by the thousands.

              I don’t hear anything from them about the birds we don’t have because of farming or logging or building apartment buildings.

              It actually takes a person with a moron level IQ to take the birds versus wind argument seriously in terms of the big picture.

              It is astounding that they think anyone who is a regular visitor to a forum focused on oil depletion and peak oil in particular and fossil fuel depletion in a general way would take them seriously.

              Such people are welcome in forums such as the ones run by the Washington Times.

              They are glad to entertain comments about bird losses involving wind farms but they aren’t too keen on talking about the loss of birds and all other wildlife in places where coal is strip mined or mountain top removal is the norm.

          • Lloyd/Canuckistani says:

            I know!
            And all those tall buildings in cities everywhere…birds killed by the thousands!

            And all those farms and cows destroying habitat for native species!

            And all the bugs smashed on car windshields every day!


            What? You meant only the tiny, irrational, limited case you were making, and not a global argument? Well, tough. Our species is hell-bent on making the biosphere uninhabitable for ourselves, and saying we can’t change anything because we gotta save the birds is silly. While it is unlikely we can adapt fast enough, demanding we take our foot off the brake and embrace BAU is the dark side.


  8. For the record: Eagle Ford is two words. Check out what the Texas Railroad Commission has to say about the name:

    Eagle Ford Information

    The name has often been misspelled as “Eagleford”….

    It is named for the town of Eagle Ford, Texas where it can be seen on the surface as clay soil. Eagle Ford, Texas is approximately 6 miles west of Dallas, Texas.

  9. Jeju-islander says:

    Here is an interesting article discussing the history of the Oil Drum website.

    The part I think is most relevant is
    “The announcement of TheOilDrum’s closure in the Summer of 2013 was thus far from a surprise. The website had drifted too far from its origins, slowly loosing its relevance. The mainstream media that took notice blamed it on “tight oil”, a mere reflex of their obsession with the US. In fact, the fate of TheOilDrum was sealed years before with the repositioning against renewable energies and difficulties in tackling nuclear. World petroleum production and prices have been stalled for several years, whereas in alternative energies relevant developments have accelerated. By sticking with the former and ignoring the latter TheOilDrum set a path to oblivion. “

    • Watcher says:

      Whaaa. They shut because they wanted to.

      I do wonder if, on the global warming websites, people spam oil production data and discussion.

    • Old farmer mac says:

      Who ever wrote that obviously did not read The Oil Drum or contribute to the discussions there.

      That article is pure bullshit.

      Running a website as large and busy as TOD was is a hell of a job and the people running it devoted years of their lives to doing so.

      It was time for them to move on.

      There was a more or less continuous discussion there pro and con about renewables and nuclear power with plenty of people with good arguments lining up on both sides of these issues.

      I know because I commented there almost every day for years.

      And while the majority of the commenting member were sure peak oil would be an acknowledged fact by now — they were much closer to right about supplies and prices than the ” business as usual ” crowd.

      And if the media were to actually be honest and call oil oil and ethanol moonshine and biodiesel biodiesel rather than oil,etc- it is pretty likely that they would have to admit that peak oil is here and has been here for the last decade or so given or take the statistical noise.

      Apples and oranges can be added if you are counting pieces of fruit.

      But barrel of natural gas liquids and other such non oil stuff cannot be added to real honest to Jesus barrels of crude and get an honest answer because first of all ethanol and ngl’s have substantially less energy than real crude and processing them into forms that make them usable as oil substitutes uses up even more energy.

      There is little doubt that we have already passed peak oil per capita and I think it is very likely that we have also passed peak liquid fuel energy both in per capita and in absolute terms.

      A barrel of ethanol may have about seventy percent (iirc) of the energy of a barrel of crude but after you cancel out the diesel the farmer who grew the corn used and the diesel the trucker used to deliver it to the distillery and the diesel used to deliver it as a blend to service stations and the diesel used to mine the coal and drill for the natural gas used to dry the corn and manufacture the fertilizer and operate the distillery– well, that barrel of moonshine might be worth at the most half a barrel of real crude.

      But coming up with a precise answer to the ethanol energy balance is basically almost impossible because so long as we eat meat the distillers grain leftovers are a very valuable product that would other wise have to be produced in farm fields and harvested and fed to the animals we eat.

  10. Political Economist says:

    I read from today’s Wall Street Journal (in the marketplace section) that North Dakota shale oil is not causing large quantities of radiative waste.

    • Political Economist says:

      Well, unfortunate typo. I meant “North Dakota shale oil is NOW causing large quantities of radiative waste.”

      • Watcher says:

        It’s true. Radium lives in shale. Frack it and the uprush of water and oil will carry it to the surface.

        Big numbers, too.

  11. SRSrocco says:

    This cartoon sums it up nicely.


  12. Why Hubbert was wrong. US petroleum production in 2014

    “No mineral, including oil, will ever be exhausted. If and when the cost of finding and extraction goes above the price consumers are willing to pay, the industry will begin to disappear,” according to MIT professor Morris Adelman.

    Well hell, that’s exactly what peak oilers have been arguing for years. However peak oilers see that as a problem, the cornucopians see it as no problem at all because:

    If oil becomes too expensive it will be replaced by other forms of energy, just as coal replaced wood in the 19th century, and oil replaced coal in the middle of the 20th century.

    Well cold fusion comes to mind. 🙂

    In that sense, Hubbert’s theory is technically correct but practically meaningless because it rests on an essentially static view of technology.

    The thrust of that argument is that technology will provide something better and cheaper than oil. I see this as the primary reason that the vast majority of people see no problem with energy depletion. That is they have ultimate faith in technology. Even many peak oilers have the same worldview. Peak oil will happen, they believe, but technology will save us. That is what William Catton referred to as “Cargoism”.
    Excerpt from Overshoot

    Some people have faith that technological progress will stave off major institutional change.	
    • Fuser says:

      I checked Amazon hoping it was available for Kindle. It’s not. I new hardcover edition is nearly $2,500.00

      • It is available, paperback, from Amazon.com for $24.90, new. Used $12.70. I have the softback edition. I once had the hardback but gave it away.

      • Joel Caris says:

        Paperback is $25, Fuser. http://www.amazon.com/Overshoot-Ecological-Basis-Revolutionary-Change/dp/0252009886/ref=sr_1_1_title_0_main?s=books&ie=UTF8&qid=1397760109&sr=1-1&keywords=overshoot

        It’s a brilliant book and well worth reading. I highly recommend those who haven’t read it grab a copy or check their local library.

        It has one of my all-time favorite quotes. It both helps me to forgive us humans our idiocy, places our species in an ecological context, and also makes it clear the power we have to change our situation by actively making different choices as individuals–even if most of us are unlikely to do that until forced:

        “Using the ecological paradigm to think about human history, we can see instead that the end of exuberance was the summary result of all our separate and innocent decisions to have a baby, to trade a horse for a tractor, to avoid illness by getting vaccinated, to move from a farm to a city, to live in a heated home, to buy a family automobile and not depend on public transit, to specialize, exchange, and thereby prosper” (pg. 177).

        Seriously, it’s one of the best books you can read about ecological limits and the hard realities of the future.

    • BW Hill says:

      If oil becomes too expensive it will be replaced by other forms of energy, just as coal replaced wood in the 19th century, and oil replaced coal in the middle of the 20th century.

      All that professor Aldment has to show is that there is an other energy source that can deliver 423 trillion BTU/day, or 606 BTU/cubic inch, and he has won his argument. Di-lithium crystals come to mind?


      • Watcher says:

        Hmm I get 476 trillion.

        • Watcher says:

          My recall is coal replaced wood cuz no trees existed east of the Mississippi river any longer. I’m sure tree price went up, but even if tree price were X2000, that didn’t generate more trees.

          • Calhoun says:

            I sometimes see photos from early 1900s of areas of NY that are now forested and in the photos they are barren. I predict that will happen again within 100 years.

            • Watcher says:

              OTOH the farmland surrounding NYC that fed it is now Walmart parking lots.

              Which may not be all bad. Parking lot chunks will burn to keep people warm in winter.

              • Aws. says:

                New Jersey needs to rename itself, “the garden state” no longer carries weight.

    • Old farmer mac says:

      ”If oil becomes too expensive it will be replaced by other forms of energy, just as coal replaced wood in the 19th century, and oil replaced coal in the middle of the 20th century.

      Well cold fusion comes to mind. 🙂

      In that sense, Hubbert’s theory is technically correct but practically meaningless because it rests on an essentially static view of technology.”

      You can graduate with a degree in economics without taking a single real course in the hard sciences at most universities.

      You might have to take a single so called ”survey course”- one semester no math no lab no outside reading.

      Such courses are the lip service paid to science education by most universities and the only possible way to fail one is to fail to show up and take the tests and exam.

      Students who fail everything else including gym pass these classes. You don’t have to understand anything about science any more than a sixth grader has to understand about American history to pass sixth grade. If he can remember that Columbus ” discovered” America and that Pocahontas married John Smith he is home free.

      Nobody needs take my word for this the data is online on just about every university’s website..

      I am convinced the average person on the street knows more about economics than the average economist knows about physical realities determined by by physics.

  13. Calhoun says:

    It’s MIT — they believe that technology can solve any problem. But how could this professor be ignorant of all the attempts that have been made to come up with new sources of energy over the past 30 odd years? Efforts that have either failed miserably or have not come close to living up to their expectations!

    Let’s think about what the alternative would have to look like. First and foremost, it would have to be a liquid with similar properties to oil and it’s products. Why? Because we have spent the last 100 years building a world that requires liquid fuel derived from oil to run its transportation infrastructure. Even assuming safe and economical forms of electrical generation could be invented, how long would it take to convert systems to use it? And what of air transportation? And shipping — are we going back to coal for that?

    And how do we replace all the products derived from oil? All the plastic and rubber? And what are farmers going to use — electric tractors? And does anyone really believe we are going to get that electricity from solar or bio fuels?

    We are living at the tail end of a one-time-forever era of cheap energy abundance. It’s ending. Over. And there is nothing the wizards at MIT or Stanford can do about it. No, there is something they can do, they can make us believe that an answer is forthcoming so that our disappointment will be that much greater.

    • Watcher says:

      “We are living at the tail end of a one-time-forever era of cheap energy abundance. It’s ending. Over.”

      It’s not over if you have small children. That is the definitive thinking.

    • BW Hill says:

      It’s MIT — they believe that technology can solve any problem.

      The tremendous advances that we have seen in technology over the last century have come primarily at the expense of huge energy inputs. If energy is the problem, then how could more of it be the solution?


      • Watcher says:

        It will soon be 1/2 a century since walking on the moon. It was just 3 years after Columbus got to the Dominican Republic that the longest lived city in the western hemisphere was founded, and that was a very hostile environment for Europeans.

        The SST no longer flies.

        Airliner velocity is no higher than it was in the 1970s.

        Telephones without wires vs telephones with wires is not all that much different from airplanes with quieter engines than louder engines. Insignificant.

        Are we sure technology is advancing?

        • cytochromeC says:

          All the great advancements were made before 1970, with most between 1875 and 1950.
          Physics has gone nowhere after the Standard Model, with string theory starting to look like good fiction, with some elegant math.
          Biology has been the exception.
          The “Ice Man’s” technology (5000 years ago), from shoes to cooking, is not much different from today.
          The digital revolution so far has been data, security(or lack of) and games.

      • Dennis Coyne says:

        As fossil fuels are depleted they become more expensive. Alternatives such as wind and solar become more competitive as the prices of oil, natural gas and coal rise.

        Cars will become more efficient (like the Chevy Volt say) during the transition and many will be priced out of the car market moving to busses, light rail and trains. Airline travel will be much more limited.

        Ron may be right about oil prices not rising as fast as in my model above, we could think of that as the optimistic case (in that the economy can adapt to an annual 6% rise in real oil prices). In many ways if we think that peak oil will arrive at some point (let’s say by 2020), my expectation is that this will lead to rising prices, the disagreement is mostly how fast can they rise without an economic collapse?

        An alternative model is that real oil prices don’t rise at all because any rise in price will send the economy into a tailspin, that would clearly lead to lower output from the Eagle Ford shale play.

        So I have tried the model with real oil prices at $100(2013$) from now until 2051.
        ERR is reduced in this model to 4.8 Gb, all other economic assumptions as before, fewer wells are added after 2018 to maintain positive profits.

        • Political Economist says:

          So this actually does not change your predicted peak year and peak level of output for Eagle Ford.

          Historically, both for the US and the global economy, when oil spending is more than 5% of GDP, the economy becomes vulnerable.

          Today’s world GDP is about 75 trillion dollars. 5% would be 3.75 trillion dollars. World oil consumption is about 90 million barrels a day or near 33 billion barrels a year. The implied threshold oil price is 114 dollars a barrel. Brent has been near this level for some time but West Texas has been significantly lower.

          That’s for today’s world economy. If we allow the world economy to grow by 3% a year (in “real” term), the threshold oil price in 2020 would be about 137 dollars a barrel. Anything significantly above 137 dollars, say 150 dollars a barrel for a sustained period, would certainly be dangerous for the global economy.

          • Dennis Coyne says:

            Hi PE,

            There are two ways to reduce the amount spent on a product, one of them is price, the reason the prices are assumed to rise is due to scarcity of oil, so you need to consider both price and quantity.

            How do we grow by 3% but use less oil? More fuel efficient vehicle fleet and fewer vehicle miles travelled. More rail for long haul freight, electrify railroads, I imagine you could think of a few others.

            Will it be easy? Absolutely not. Possible? I think so.

            • Political Economist says:

              The world’s existing capital infrastructure depends on oil. Every year you can only replace a small portion of it. Say, every year you replace 5% (for buildings and bridges the percentage would be smaller, for cars and machines the percentage would be somewhat higher). With 3% growth rate, the new capital stock annually installed is about 8% of the old capital stock.

              Assuming that for the new capital stock, oil intensity is 50% lower than the old stock (highly unlikely, but for the sake of argument). For the entire economy, the overall oil intensity falls by 50% * 8% = 4%. But the economy grows by 3%. So the overall oil consumption only falls by 1%. In the post-peak oil world, can we achieve 50% oil intensity reduction on the new capital stock (relative to the old capital stock) every year?

              More realistically, assuming the oil intensity of new capital stock falls by 25% compared to the old capital stock. The overall oil intensity falls by 25% * 8% = 2%. With an economic growth rate of 3%, oil consumption would need to rise by 1%. This is more or less what have got since 1980. Before 1980, oil intensity generally stayed constant or tended to rise.

              Now, if it’s only realistic to reduce the capital intensity on new capital stock by 25% (for the world economy in the long run, not for some individual countries or individual years), then to keep oil consumption constant (not to say to accommodate falling oil consumption), it would require economic growth rate about 1.5%.

              With 1.5% economic growth rate, new capital stock would be 6.5% of old stock stock. Overall oil intensity falls by 6.5% * 25% = 1.625%. Oil consumption could fall by 0.1% a year.

              Historically, any world economic growth rate below 2% was considered global economic recession. This happened in 1974-75; 1980-82; 1990-92. In 2009, the global economy had an outright contraction, the first time since WWII.

              • Dennis Coyne says:

                Hi PE,

                In the long term the price elasticity of demand for oil may be different than it has been in the past. You cannot assume that past oil intensity rates will be be limited, over time these can be reduced by a large amount. It depends on prices, if they remain at present levels there will be little change in oil intensity, as prices rise and it is expected that they will continue to do so (peak oil is widely recognized), oil intensity will decrease by 10% per year, over 20 years that would be a 78% decrease in oil intensity. Can’t happen?

                “Always with you it can’t be done.”

                • Dennis Coyne says:

                  Also, the oil supplies will be limited, we will use what we have, either growth slows or oil intensity decreases faster than you think possible, it will probably be a bit of both, growth will slow and either people will figure out a way to do more with less oil or we will be in a permanent recession, I guess I think people will decide that although 20th and early 21st century capital depended on oil to a great extent, they will use more natural gas, coal, wind, and solar.

              • Old farmer mac says:

                I am not afraid to make a fool of myself occasionally and I am certainly not an economist although I did get the abcs of the field as it was taught back in the dark ages in most universities.

                So P E go ahead and shoot me down if you can and I will learn something.

                But I think you are trapped inside an intellectual box defined by your professional training – which is a very very common failing.

                It is one however that I was immunized against as an undergraduate agriculture major back in the dark ages in this fashion.

                I took the real biology classes with the biology majors thru my sophomore year, ditto the first two years of chemistry with the chemistry majors. Same classrooms same hours same professors same labs and textbooks.

                My ag professors were telling me how wonderful a technology antibiotic feed additives were and that there was no evidence that using them in livestock feed would cause long term problems.

                The biology professors were livid about it and insisted that such practices would result in worthless drugs and superbugs.

                My econ professors insisted that resources could always be invented or manufactured or substituted.

                But my agronomy and hort texts – cowritten by people with doctorates in biology as well as agronomy- were full of such statements as ”There is no substitute for phosphorus.”

                And there isn’t.

                My point is this:

                Economic theory holds in economic text books.

                In the real world it holds when the predictions are based on the right assumptions. Under a normal ” business as usual ” scenario your rate of replacement of infrastructure is probably excellent.

                But ”business as usual” is not going to be the prevailing paradigm.

                I have been argueing with deflationists for years about the banking industry failing to loan money and crashing the economy. They just can’t get it thru their heads that when things get bad enough in terms of deflation the current rules of banking and finance will go out the window and new ones will be instituted. Congress and the Supreme Court are sort of flexible when survival is at stake and those of us who think the fed is all powerful and untouchable don’t have a clue . Consider our response to the attack on Pearl Harbor.

                There is nothing off the table when survival is at stake and deflation will never be allowed to destroy the economy. We will have a twenty dollar minimum wage first and a guaranteed income and any body offered the money printed in payment for a debt will accept it or go to a federal jail.

                I am not saying inflation can fix the economy because it can’t – it can buy some time and that is about all- but it can be ramped up to any extent desired by a sovereign government.

                Infrastructure can be replaced at a blistering fast pace when we get our tails caught in the barn door and the pain is great enough- blistering fast compared to your eight percent any way.

                If for instance we consider the energy needed to maintain a typical house and lifestyle if the government decides that energy efficiency and conservation are policies to be pursued with the same vigor as securing foreign oil supplies or propping up banks a five hundred dollar subsidy would be enough to double the energy efficiency of a new refrigerator and if I were allowed to write the regs a hundred bucks would be enough- because I would just specify more insulation and a slightly smaller interior and a couple of other easy changes.

                LED lights can be mandated at reasonable cost within five more years and that alone would cut electricity consumption enormously.

                It would be perfectly reasonable to make it against the law to own a 6000 pound 4×4 pickup truck without paying a thousand a year in additional taxes along with the registration. Or two thousand – however much it takes. Plumbers and carpenters and farmers can write off the expense and pass it on – or get it rebated at tax time if the truck is a legit business truck. Meaning it actually hauls a load other than the owners fat butt.

                We have countless of people working at various make work jobs on the public dime and as the economy declines due to energy issues we could put them to work installing triple glazed windows and attic insulation rather than building more freeways and football stadiums for mega rich team owners.

                We could change the motor vehicle laws so that anybody with a clean driving record and recently inspected vehicle could provide a ride for pay to anybody who is willing to pay- without risk of personal liability.

                This could reduce the number of people commuting one to a car substantially.We have cell phones these days and with a pic of the driver and passenger time dated and stored kidnappings and robberies would not be much of a problem.

                I don’t believe in scrapping good cars and trucks – not yet any way because older ones that are not fuel efficient are still very much needed and can be economically owned and operated by folks who don’t drive them much.

                I for instance own an old 4×4 truck that is a real gas hog but I don’t use it except when I really need a 4×4 for real work and a tank of gas lasts anywhere from a couple of weeks to a month most times.I am trying to sell my Dads 97 Buick which is a great car but it gets only twenty mpg around town and about 28 or so on the highway. But a retiree who drives very little would spend a lot more for insurance with this heavy safe car than he would for gasoline.

                And keeping it in use means that we need one less new car for however long it lasts. Right now it would be replaced with a car getting a little over thirty mpg. In a decade it will be replaced with one getting over forty mpg – or a plug in hybrid or an electric car.

                If we did put in another cash for clunkers scheme we could put some teeth into it this time and mandate that the rated fuel economy of the new vehicle be at least fifty percent greater than the junker.

                We could put an end to the manufacture of throw away appliances for the most part by mandating a really good warranty. If it breaks and not as the result of obvious abuse within say five years you get a free replacement or repair. It costs very little to upgrade quality so things just don’t break compared to constantly replacing them.

                Of course the advertising and marketing guys wouldn’t like such a policy -except when buying things for themselves of course.

                I don’t think we will actually do most of these things.

                But my point is that we will do some things much differently once we have no choice and cumulatively ”some things ” are apt to add up pretty fast.

                • Political Economist says:

                  Hi, old farmer, thank you for your long reply.

                  But in this case, if you read carefully, you may find out that it’s me (economist) who has less confidence in substitution and Dennis is suggesting that 10% annual reduction in oil intensity may be possible and may be sustained for 20 years.

                  I’ve been trying to argue this is not likely givern the inertia of infrastructure (regardless of more fundamental constraints, like the difficulty to replace liquid fuels with electricity)

                  • Old farmer mac says:

                    Hi PE ,

                    Sorry I failed to phrase my comments a bit more carefully but I do believe a ten percent annual reduction in oil intensity is theoretically possible at least.

                    My intent was to ask you to refute this argument from a theoretical or practical standpoint.

                    I don’t think we actually will reduce oil intensity at such a rapid pace- until doing so is forced on us by reality.

                    But reality has a way of forcing the hands even of kings and it eventually penetrates even the heads of cabbages.

                    When I was a kid most of us owned honest to god hotrod cars.

                    Nowadays only the doctors and lawyers kids have real hot rods and the kids with minimum wage jobs don’t have cars at all.

                    The ones without minimum wage jobs mostly don’t even have driver’s licenses.

                    It is true as somebody pointed out that a lot more houses than usual are sitting empty out in the countryside but most of them are not for sale or rent in my area.

                    They are the property of folks like me who don’t need them and yet don’t want to see strangers living in our parents houses.

                    When my generation is gone those houses will be sold in a flash by grandkids who barely remember their grand parents.

                    And cost conscious retirees who aren’t afraid of being thirty minute or hour ride from the hospital are beginning to understand what a bargain such a house can be when you own a compact car and need to go to town only once a week or less.

                    I agree that high fuel costs are going to play hell with tourism but consider this.

                    The fuel bill will be whatever it is.

                    If it costs an extra five hundred bucks to get to and from your chosen destination then the hotels there will eat the five hundred bucks shortfall by lowering their rates.

                    They have that choice and will make it rather than sit empty since the variable cost of renting a room is trivial in relation to the actual rates usually charged in resorts.

                    The airline has no choice at all except to cancel flights and fly smaller planes which will actually cost more to fly per passenger mile.

                    So the resorts will stay open a lot longer than most people think .

                    But the road warriors will be doing more videoconferencing and people flying to vis it relatives will fly much less.

              • TechGuy says:

                “In 2009, the global economy had an outright contraction, the first time since WWII.”

                Its still contracting:

                US Domestic Oil Consumption:

                Labor force Participation rate:

                Notice that the Participation rate peaked when Oil was the cheapest back in the late 1990s. Ever since the Price of Oil has risen, the participation rate has fallen.

                • Political Economist says:

                  Yes, my point is that even 2% growth would be considered by economists as global recession. In other words, 2% growth is very bad, implying massive economic and political instabilities in large parts of the world.

                  For example, 1974/75 was time of stagflation. 1979, Iranian Revolution, followed by debt crisis in Latin America. 1990-92, collapse of Soviet Union.

                  So outright contraction, of course, is even worse.

                • TechGuy says:

                  PE Wrote:
                  “Yes, my point is that even 2% growth would be considered by economists as global recession. In other words, 2% growth is very bad”

                  I am not disagreeing with you, merely adding to your argument. The US economy not growing at 2%. Its inflation that increasing and Gov’t Fudging numbers aka (CPI) that is masking Inflation for growth. If you use the old formulas for calcing GDP, CPI, unemployment used in the 1970s and early 1980s, the US economy is contracting.

                  Since about 2010, the US economy is been in a state of asymmetrical stagflation. Food, energy, heathcare, education all have significant price increases. Wages are stagnate to declining depending on the services and goods being produced. Only prices for foreign imports have been flat, but most of the exporting nations have high-inflation (China, India, etc). Gov’t of exporting nations have been trying to protect their export driven economy with currency manipulation to prevent prices of exports rising. Although, this will end soon, since double digit food inflation is about to begin because of the drought. Gov’ts are going to find it almost impossible to retain BAU for much longer.

  14. VK says:

    The reason that there has been any growth at all in the last decade is due to the ridiculously astronomical rise in total global debt.

    In 2002 total global debt was $80 Trillion. As of 2013 it was 223 Trillion dollars! And now it’s higher still if we had the latest data!

    Total global debt has been rising by roughly 11pc per annum since 2002.
    Real global GDP growth has averaged 3.8pc since 2002.
    Global population has risen by 1.2pc pa since 2002.
    Central bank balance sheets have skyrocketed by 16pc pa.


    While total crude oil plus condensate output rose by 1.012pc pa from 2002-12.

    In effect since our civilization completely depends on burning dead organisms from millions of years ago. It’s taken a stupendous $143 Trillion to raise global oil output from 67 Mn bpd from 2002 to 75.6 Mn bpd by end 2012!

    Every million bpd increase in global oil production has cost $16.6 Trillion in extra debt. It took $80 Trillion in global debt to increase oil production from 0 to 67.2 Mn bpd in 2002. Or $1.2 Trillion in extra debt for a 1 Mn bpd increase in oil output.

    • VK says:

      Now some will nitpick that oil is only 34pc or so of the total global energy supply mix. Now all economic activity is dependent on energy or burning ancient dead stuff.

      So the marginal cost of a million barrels of oil prior to 2002 was o.34 x 1.2 Trillion dollars, so about $400 billion in global marginal debt to bring online that extra crude.

      Post 2002 the marginal cost is $5,644 billion to bring an extra 1 Mn bpd online. Or $5.64 Million in extra global debt to bring 1 extra barrel of oil online.

  15. B says:

    Watcher, you in particular might find this article about the frac sand business interesting.

    Fracking Sand Spurs Grain-Like Silos for Rail Transport

    Miners such as Emerge Energy Services LP (EMES), U.S. Silica Holdings Inc. (SLCA) and Hi-Crush Partners LP (HCLP) are taking a page from the grain industry’s playbook to deliver sand faster and cheaper. They’re building facilities at their mines to load unit trains [of 100+ cars], which move just one type of cargo, and near oil fields to empty them.

    Unit trains will move about 25 percent of sand sent to oil and gas users this year, a fivefold surge from 2013, and the share could rise to 50 percent in the future, according to U.S. Silica. Union Pacific and BNSF, the two major carriers in the western U.S., are poised to benefit from shale-oil production in the region and sand mines in Wisconsin, Illinois and Minnesota….

    Unlike crude-by-rail shipments that face pipeline competition, frac sand is railroads’ domain. The amount hauled is growing faster than drilling activity as oil producers find they can improve yields by packing in more sand per well.

    “Everyone has their own recipe, but nearly every method to improve production means more sand per well,” said Taylor Robinson, president of PLG Consulting, a Chicago-based logistics consultant.

    • Watcher says:

      As if Warren didn’t know this when BNSF was bought.


      • Old farmer mac says:

        It ain’t only sand and coal he expects to haul.

        The days of long distance trucking are over but the industry hasn’t realized it yet. The only hope for long haul trucking is a conversion to natural gas fueled trucks which is perfectly feasible but depends on gas being cheap over the long term.In my estimation the industry is not willing to make that bet which is why we don’t see very many natural gas fueled trucks.

        I expect that unless the economy collapses there will be a lot of branch rail lines reopened and some new ones built within the next couple of decades.

        Managing the cars is a snap these day compared to times past.I foresee mini locomotives driven by natural gas or diesel or electricity becoming a familiar sight pulling a half a dozen cars into small towns from sidings on the main lines ten or a hundred miles away. Such a locomotive might actually be a lot like a truck in that it could be built to haul a good sized load onboard so that a freight car is not even needed if it is loaded at a siding with a mixed load of heavy goods such as lumber and fertilizer and so forth.

        There is really no need for more than one man on a small modern train. He can replace half a dozen or a dozen truckers by making one run a day on his dead end line.

  16. B says:

    Harold Hamm: The Billionaire Oilman Fueling America’s Recovery

    Two Scotches in, with seats on the floor of Oklahoma City’s Chesapeake Energy Arena, Harold Hamm is feeling good. And why not? His hometown Thunder is spending the evening whupping the Philadelphia 76ers. Earlier Hamm announced big bonuses for Continental Resources employees, courtesy of record oil production. And a judge’s ruling, revealed that morning, in Hamm’s divorce case suggested the energy tycoon would keep the Continental shares he already owned when he married soon-to-be-ex Sue Ann Hamm 26 years ago. With that chunk of stock, encompassing about $16 billion out of his $16.9 billion fortune, Hamm owns 70% of Continental.

    As every wildcatter knows, such is life in the oil patch when you’re on a hot streak. And Hamm’s on perhaps the most epic one in domestic energy history, perhaps save for John D. Rockefeller’s. No one, aside from kings, dictators and post-Soviet kleptocrats, personally owns more black gold–Continental has proved reserves of 1 billion barrels, mostly locked underneath North Dakota. Hamm took the company public in 2007–and shares are up 600% since, as the revolution in horizontal drilling has given America a cheap energy booster shot, fueling factories, keeping a lid on gas prices and adding millions of jobs.

    • Watcher says:

      Not how that ball bounces.

      The shares are indeed pre marital assets. Appreciation of the shares since marriage are divisible — and that’s since marriage in 1988.

      He can keep the shares, but he’ll have to pledge them as collateral to raise the billions she gets.

  17. aws. says:


    For this analysis, EIA considered 42 U.S. and international oil and gas companies that have reported data on upstream expenditures since 2000. The companies range in size of production and include publicly traded as well as state-owned enterprises, including large producers such as ExxonMobil and Petrobras, and smaller ones such as Encana Corporation and Talisman Energy. […]

    Although oil prices remained relatively flat in 2012 and 2013, rising costs contributed to a decline in cash flow from operations. Nonetheless, cash spent on investing activities, which tends to lag changes in cash flow, increased slightly in 2013 as companies increased debt to maintain investment, taking advantage of interest rates that have been low since 2009. Companies have increased debt every year since 2006, with long-term debt increasing 9% and 11% in 2012 and 2013, respectively.

    • Calhoun says:

      Thanks, AWS. That graph makes it crystal clear. This is the story that is quietly pulling the rug out from under unconventional oil. By the end of this year, I believe, the effects of this cash crunch will become evident in lower exploration activity followed shortly by either lower production growth or actual decline.

  18. Coolreit says:

    More EIA lies: this time natural gas false reporting as described by Robry, a leading nat gas expert:

    Todays EIA Natgas Report
    Todays EIA miss to the EIA-weighted model (like last weeks miss) was generic… missing in the same direction roughly proportionally in all regions (Producing region 3.6 BCF, East 8.8 BCF, West 0.4 BCF.

    For the second week in a row, the EIA number was “salty” (8 BCF of the 24 BCF injected was salt in this weeks report).

    For the last two reports combined… 16 BCF of the EIA’s 28 BCF of reported injections were reported as salt.

    The salt-skew in the EIA-weighted model (that has been clouding analysis for the last year and a half in my modeling) is haunting the EIA reports badly right now. I seriously doubt that we injected anything in the past two weeks given the spread of the data in the last two EIA’s.


    • Dennis Coyne says:


      Your claims on EIA reporting on Texas oil are incorrect. EIA C+C data is much more accurate, note that I am not talking about the numbers in the drilling productivity report (which are pretty bad), but the monthly estimates at the link below:

      The EIA is attempting to estimate Texas C+C because the RRC data is so bad (for the most recent 18 months). If we do a regression on the EIA TX data from Jan 2012 to March 2013 the slope of the line is 48 kb/month, they have just extended the trend out to Jan 2014, not the best way to do it, but budget cutbacks at the EIA have made such estimation techniques necessary. See Chart.

      • Dennis, you are correct but I would bet a lot of money that this increase of 48 kb (per day increase) per month will not hold up through 2014. In fact I would give two to one odds.

        • Dennis Coyne says:

          Hi Ron,

          I agree it will change, the question is by how much, if you were betting 2 to 1 that it will change by any amount that is less than 48 kb/month it is a safe bet.

          If you are betting that the average monthly increase for 2014 will be 24 kb or less per month for TX C+C, I would take the other side of that bet.

          I realize you said no such thing, by the way, you said that the increase of 48 kb/month will not hold up through 2014, a very safe bet as it could be interpreted as any increase other than 48 kb/month (49 kb/month or 47 kb/month) would win the bet.

          I think the implication is that you expect it will fall below 48 kb/month, how much do you think 10%, 50%?

      • Coolreit says:

        Which is the original source of the data: the RRC or the EIA? Why do you consider the EIA an original source?

        • Dennis Coyne says:

          Hi Coolreit,

          The EIA data for recent months is different from RRC data, so I assume that the EIA data, which is an estimate of TX C+C output is original data. EIA also surveys large oil producers independent of the RRC of TX. It used to have the budget to do a statistical sampling exercise and their estimates used to be much better on a monthly basis, now they are just assuming the past trend will continue. I agree with Ron that this is unlikely to continue indefinitely. The EIA I am sure is aware of this as well. I think that when they produce the Annual Energy Review they will do some of the statistical analysis of the survey data and revise their estimates, I believe it is scheduled for August, but it will likely be September or October before it is published.
          At that point Ron will be proven correct and they will adjust the data from Jan 2012 to March 2014 to their best estimate, then they will probably run a regression on Jan 2013 to March 2014 and start extrapolating that trend forward. It will be interesting to see the change in the data.

  19. Old farmer mac says:

    I am not sure EXACTLY what this term ” salty ” means in this context but it is obviously not good.

    Is this source saying that about a third of the gas supposedly going into storage — isn’t?

    That is HUGE discrepancy and if true it indicates a major glitch in the reporting system or else a bombshell that must hit the front pages no later than this fall when we need the gas again for heat.

    • Coolreit says:

      Robry also posted about these EIA lies a week or two ago. I posted about the EIA lies about Texas oil production in the recent past. It all adds up to a political agenda designed to keep energy prices low so that the banksters can keep collecting their $55 billion/month from the Fed at the expense of Americans who are not banksters!

      • Calhoun says:

        How could a false report affect actual oil/ng prices? These prices are determined by what is actually available and the actual demand for it, not what some report says. Reports can affect futures contract prices, but futures prices are not spot prices.
        I don’t see how spot price would be affected. And how do you know that Robry is an expert?

  20. Political Economist says:

    This is in relation to the discussion with Dennis on oil intensity. In particular, the question has to do with whether annual reduction of oil intensity by 10% or so for the global economy or for a large economy is realistic or not.

    The graph below compares the annual rates of change of real oil price and oil intensity of world economy from 1980 to 2012. Real oil price is annual average Brent spot price corrected for inflation (measured in constant 2012 dollars). Oil intensity is measured by oil consumption per million dollars of world GDP (in constant 2005 international dollars).

    The good news: since 1981, world oil intensity has declined every year (shown as negative annual rates of change). The not so good news: the average annual rate of reduction has been 2.2 percent. The annual rate of reduction exceeded 3 percent only in 3 occasions: during 1981-1985, briefly in 2000, and during 2005-2007.

    How has oil intensity responded to real oil price changes? I did a simple regression:

    Oil Intensity = constant + b1*P0 + b2*P1 + b3*P2 + b4*P3

    All variables are in growth rates. P0 is the growth rate of real oil price in the current year, P1 is the growth of real oil price one year ago, P2 is the growth rate of real oil price two years ago, and P3 is the growth rate of real oil price three years ago.

    Here are the results:

    Oil Intensity = -1.958 – 0.011P0 – 0.007P1 – 0.015P2 – 0.010P3

    Other than the constant, only the coefficient for P2 is statistically significant (at 95% level). R-square is 0.229, The results say that the world oil intensity has an autonomous tendency to fall by 1.96 percent a year. If we add up the four coefficients, then over a 3-year period, an increase in oil price by 10 percent will result in a reduction of oil intensity by 0.43 percent. A doubling of oil price (an increase by 100 percent) will reduce oil intensity by 4.3 percent.

    World economy cannot survive too many oil price doublings.

    • Political Economist says:

      All rates of change are in %

      • Dennis Coyne says:

        Hi PE,

        Nice analysis. I wonder if rather than the % change in prices was used, if the real price level was used in the analysis if the results might change.

        I believe that the response to changes in the real level of oil price is the important factor and that there would be a considerable lag, probably 2 years or so.

        In fact, the best analysis would be to look at the average real oil price over a 3 year period and see how that relates to oil intensity, looking at rates of change in prices will not get you very far as these bounce around too quickly for there to be a response in oil intensity, it is the average price level that matters.

        Also, the 10% figure was thrown out as an illustration, a 2% annual reduction in oil intensity gets us to a 67% reduction after 20 years. So by 2034 a 50% reduction in oil intensity looks pretty realistic.

        The model can be adjusted of course to a 3% increase in real oil prices, which would match a 3% increase in real GDP, or we could do a 4% rise in real oil prices due to the decrease in oil intensity. What makes sense from your perspective?

        Another thought is to focus in on the 1998 to 2012 period, what was the average change in oil intensity over that period and how does it compare to the 1985 to 1997 period (where the oil price level was relatively stable.)

        • Political Economist says:

          Dennis, thank you for the thoughtful suggestions. The above analysis includes lagged prices (from one year to three years) already.

          I also tried price levels. I remembered the results are most significant when you look at the effect of three-year moving average prices on the fourth year. I’ll post more tonight.

          I absolutely agree that an annual rate of reduction of 2% will produce large effects over time, halving the oil intensity in every 35 years (not 67% in 20 years, that would require 5.4 percent annual rate of reduction). But in the post-peak oil world, if you take into account some gradual oil price rises, this would limit global economic growth to 2% or less.

          World Economic Growth Rate = World Oil Production Growth Rate + Rate of Reduction of Oil Intensity

          In the post-peak oil world, oil production growth rate will be negative.

          Historically, global economic growth rate of 2% or less is very bad, considered by IMF etc as the threshold for global recession and typically associated with outright recession for a large part, say, one half of the world as well as major political instabilities.

          • Dennis Coyne says:

            Hi PE,

            You are correct, it is a 33 % reduction.

            I have created a scenario which uses the relationship between average three year oil price level and oil intensity and assumed a 3% annual growth in World real GDP from 2014 to 2050. With prices growing at 3.4% per year on average from 2014 to 2040 and assuming the relationship between real oil prices and oil intensity from 2000 to 2013 continues, then real spending on oil consumption (constant 2013 $) remains at less than 5.3% of Real GDP for all years and is only above 5 % from 2020 to 2030 (between 5 and 5.26% over those years). As prices rise oil intensity will continue to fall.

            It is also possible that a rise in prices will result in increased rates of oil extraction, which may slow the rate that oil production falls in the short term, but will result in more rapid decline later on.

            • Political Economist says:

              Dennis, this is very interesting. What is the average annual rate of reduction of oil intensity from 2014 to 2040 in your exercise?

              An eyeballing of your second graph suggests your oil intensity falls from 0.5 in 2010 to 0.1 in 2040, implying an average annual rate of reduction of 3.9 percent. This seems to me not very realistic. In fact, if we follow your trend linearly, the oil intensity would fall below zero before 2050.

              There are two possible ways to specify the observed relationship between oil intensity and real oil price and time. One is to assume a simple linear relationship. The other is to take logarithmic values of oil intensity and real oil price first and then look at relationship between log (oil intensity) and log (real oil price) or between log (oil intensity) and year.

              We can discuss which of the two is more useful for this purpose.

              I am also interested in knowing the source of your real world GDP data. I got world GDP from World Bank. They produce several different series, world GDP in constant 2005 international dollars, world GDP in current international dollars, world GDP in constant 2005 US dollars, and world GDP in current US dollars. For calculating oil intensity over time, both constant 2005 international dollars and constant US dollars may be used. But the series based on constant 2005 international dollars is preferred as this is the one most international institutions use these days.

              I wonder if different choices of GDP accounts for some of our differences. Also, my oil intensity is measured by tons per unit of GDP, yours is based on barrels. Does your oil intensity use annual consumption of oil in barrels or daily consumption in barrels?

              I will look at the relationship between oil intensity and real oil price tonight or tomorrow and see if I can reproduce some of your results.

              • Dennis Coyne says:

                I had a long reply which was lost.

                I used IMF data, using % change in GDP constant dollars and then 2013 nominal GDP and worked backwards calculating Real GDP based on %change each year.

                Annual barrels consumption BP data.

                I used the price vs oil intensity not the time series to find oil output in the future oil consumption = real GDP times oil intensity where I assumed real prices rose by about 3.5 % per year and found oil intensity from the 3 year avg price then also assumed real GDP increased by 3% per year and used real GDP and oil intensity to find oil consumption.

                Spreadsheet at link below:


              • Dennis Coyne says:

                The average rate of decrease is 3.9% from 2013 to 2041, though it is based on the rate of increase in price over this period, I used the linear equation between 3 year average annual real oil price and oil intensity to find future oil intensity, real oil prices are assumed to rise at 3% to 2015, 4% 2016 to 2018, 5% from 2019 to 2023, and then 4% 2024 to 2027, 3% 2028 to 2034, and 2% from 2035 to 2058. It was assumed the decreasing oil intensity put less pressure on prices, for the most part I was trying to get a certain shape for the oil output curve after 2030 so these are arbitrary, over the 2016 to 2023 I was attempting to keep total spending on oil at less than 5.5%.

                • Political Economist says:

                  Dennis, just saw your detailed reply above. Thanks. (I am also posting below in case you don’t see it here)

                  Just want to bring it to your attention. BP publishes oil consumption data both in tons and in barrels. The oil consumption in tons refers to annual consumption. But the oil consumption in barrels refers to THOUSAND BARRELS PER DAY.

                  Thus, if the oil consumption is daily consumption per day and the GDP refers to the total annual economic output, when you calculate the oil intensity, the oil consumption needs to be converted in some way (say, multiplied by 365).

    • Dennis Coyne says:

      On price doublings. Brent Prices quadrupled in real terms from 1999 to 2013, in June 2013 $ the 12 month centered average monthly price was $27/barrel in July 1999 and $108/barrel in July 1013. The average real Brent price over the June 1988 to June 1999 period was $29/ barrel, using that as our base line real Brent oil prices only rose by a factor of 3.72 rather than 4. Real Brent oil prices rose at an 11.6% average annual rate over the 1999 to 2013 period.

      Whether or not the world economy is happy about such price doublings does not matter, if the price does not rise less oil will be produced. The more that prices rise, the more effort will be put into finding alternatives. I agree that it will be difficult to adjust, do you think that such adjustments are not possible?

      • Watcher says:

        Aggressive price increases could choke off investment into alternatives.

        In fact, pricing oil as XXX with investment into alternatives unfettered might be coupled with oil producers offering a price of 0.7XXX if the customer commits to and demonstrates no investment into alternatives.

        • Dennis Coyne says:

          Hi Watcher,

          So we would not be able to buy gasoline unless our car gets less than 20 MPG?

          Kind of far fetched, no?

          • Watcher says:

            No one would prohibit you buying it. You’ll just pay more for it.

            • Watcher says:

              Or is that less. hmmm

              • Watcher says:

                I don’t think you understood. The pricing in question is Russia’s or KSA’s. They will sell oil at a lower price to folks who . . . let’s phrase this in an interesting way . . . “who don’t backstab their oil supplier that feeds their family.”

  21. Oil at 244 dollars per barrel will have a cost of nothing for some, they’ll steal it, not just a little, but a lot.

    It will be pell mell chaos, pandemonium, mayhem, a maelstrom of mania.

    That’s how it will be and work.

    • Old farmer mac says:

      For once I wholly agree with Walter.

      I will add that the chaos and thievery will be at the wholesale level rather than retail.

      The thieves will be armed and organized mostly at the nation state level.

      • Dennis Coyne says:

        OFM and Ronald,

        Prices quadrupled from 1999 to 2013. Over a longer period of time we are talking about an increase by a factor of 2.4.

        We could halve the annual rate of increase in real oil price to 3% and start in 2014 rather than 2015 and we would be at $173/barrel in 2030, 2% would mean $147/barrel in 2030.

        The lower the price the less oil will be available, if the demand is there price will rise.
        My guess is that the 6% rate of increase may be conservative especially when peak energy liquids has arrived and is widely recognized. The rise in prices may reduce demand to some degree especially over a five to ten year period as people drive less, buy more fuel efficient cars and more public transportation is provided, as well as the switch of most long haul freight to trains and the electrification of rail.

        • SRSrocco says:


          While I appreciate your excellent graphs, you are falling victim to what Kunstler calls, “Wishful thinking.” The global financial system is highly leveraged and will become increasingly volatile when oil production peaks and declines.

          I see things unfolding much differently than you.

          We’ll see…


          • Watcher says:

            The BAU folks pretty much always demand inhuman behavior from people to make their visions reality. Usually there are 1) small children involved and 2) an absence of any competitive athletics background.

            People will not tolerate degradation. They will act to better themselves and their offspring. It’s mind boggling that there is a presumption that

            1) others will tolerate the US burning 22ish% of annual oil produced with 4% of global population and

            2) that the US will tolerate any attempts to force them, by any sort of imposition, that would degrade that ratio.

            The contortions of thought involved to imagine that people will happily endure worsening realities borders on insanity — especially when it is soooo much easier and straightforward . . . and in keeping with the purest forms of human nature . . . to take actions (which actually don’t have to be military) to protect self interest.

            A company threatened by a competitor will bid contracts at a loss to deny the work to the competitor. That’s human nature.

            • Dennis Coyne says:

              And of course if both competitors follow this logic then all prices would be zero. It is very simple in the long run marginal cost is equal to marginal revenue.

              • Watcher says:

                You don’t understand that scenario.

                It’s very common to want to keep a competitor out of “your space”. A European competitor might want entry into the US market, which you dominate. They have bid a contract. You underbid them, at a loss.

                This is not even remotely unusual.

          • Dennis Coyne says:

            Hi Steve,

            Yes I do not foresee the shark fin decline that many others do. Oil output will decline, but gradually at first. A rise in prices will result in more investment in oil production and higher rates of extraction, in the North Sea the extraction rates have been much higher than the world wide average, the world rate may increase as the peak hits and prices rise. If prices spike, it is likely to cause a financial crisis and a recession, if prices rise gradually the economy may adapt to higher prices.

            On the financial leverage, I have seen some articles with a 3 to 1 debt to GDP ratio. If we think of World GDP as income and the World did a calculation of how much house it could afford at bankrate.com, it would find the following: 30 year mortgage at 5% interest, 20% down, no other debt we get 480,000 in loans for 100,000 annual income, that’s 4.8 to 1 for a private individual, granted the loan is long term, but much of the debt is held by governments, large financial institutions, large businesses, and wealthy individuals.


            In the article above they say debt is 100 trillion, world GDP is 75 trillion, this does not look like a problem to me.

            Is this what you mean by highly leveraged?

            I have also seen articles with 230 trillion of debt, that is pretty leveraged. Not sure about the 230 trillion, most reports seem to use the 100 trillion number. Is the 230 trillion when unfunded future obligations are taken into account? Some of those things (future health care spending for example) could be changed with legislation. Is that where the other 130 trillion comes from?

  22. The BNSF parked 3 engines at a siding near Tioga in North Dakota, when a train crew returned to start the engines, they found all 15,000 gallons of diesel fuel was gone.

    When an opportunity presents itself, those who are able to take advantage of something too good to pass up will gladly use it.

    It is not a good business practice, but if it provides results and a real savings, it is better than money. You don’t have to get the money to then buy the fuel, you just take it.

    15,000 gallons of fuel is a drop in the bucket, nobody will miss it, just the money and know how of how to get it to the tanks. Can’t recover those losses.

    That chart would be a good one to graph.

    If you don’t use electricity to provide power to those wind towers to cool the oil in the nacelles and turn the blades to keep them from bowing, they’re going to begin to physically deteriorate, fall apart. That would mean you have to deduct the electricity used for the maintenance of the structure, deduct the oil needed to provide transportation for maintenance, fulfill the needs for maintaining it all, the costs add up to fossil fuel consumption for the wind tower to operate. They are indeed fossil fuel dependent and without oil, they’re toast.

    There is no free lunch. Free diesel fuel for a lucky thief, but still no free lunch for anybody.

    • “There is no free lunch.” ~ Ronald Walter

      The free lunches are from the fruit trees, courtesy, Earth and Sun.

      As Earth continues to become stolen, enclosed, despoiled, the more costly the free lunches will become.

      Money is a symbolic fiction in a game with no future of any worth.

      Earth does not equal money, and never will.

    • Dave Ranning says:

      Oil production by county:

      I was surprised how high Kern ranked.
      Very few produce almost all product.

      • Watcher says:

        Can’t be Mbbl/day. Must be Kbbl/day.

        The surprise is the 2 counties of New Mexico.

  23. Jeffrey J. Brown says:

    Two new charts:

    The first chart shows normalized global dry (processed) natural gas production, natural gas liquids (NGL) and crude + condensate (C+C), from 2002 to 2012, with 2005 values = 100%. All data from the EIA.

    The second chart shows Estimated normalized global crude and condensate production separately, based on the assumptions shown on the slides, and listed below.

    Global Crude + Condensate (C+C) production increased at about the same rate as global dry processed gas production from 2002 to 2005, but then we saw a significant divergence between the rates of increase in global gas production and in global C+C production from 2005 to 2012, 2.8%/year versus 0.4%/year respectively.

    According to the EIA, global gas production increased by 22% from 2005 to 2012, and I think it’s a reasonable assumption that condensate–a byproduct of natural gas production–increased by about the same amount, especially given the large increase in condensate production in the US. The problem is that other than OPEC and Texas, no one appears to track crude versus condensate, but the Texas RRC shows that the Texas condensate to C+C ratio increased from 11% in 2005 to 15% in 2012. Note that OPEC, which accounted for 43% of global C+C production in 2012 showed no material increase in crude oil production from 2005 to 2012 (31 mbpd in both years).

    If we cross correlate the OPEC (Crude only) and EIA (C+C) data bases for the OPEC 12 countries for 2005 to 2012, their Condensate/(C+C) Ratio doubled–from 3% in 2005 to 6% in 2012. OPEC accounted for 43% of global C+C production in 2012, which is a pretty good (and conservative) sampling of global crude and condensate production, especially when one considers the fact that the large increase in US condensate production would be in the remaining 57% of global C+C production.

    In any case, the data bases that we have that track condensate versus crude, Texas RRC and OPEC/EIA, both show large increases in their Condensate/C+C Ratios from 2005 to 2012, 11% to 15% and 3% to 6% respectively.

    If we extrapolated the OPEC crude versus C+C data, and assumed that OPEC was a representative sampling of global data, it would imply that global condensate production increased by about 2.1 mbpd from 2005 to 2012, which would account for all of the EIA’s reported 2 mbpd increase in global C+C production from 2005 to 2012.

    My approach has been to assume that the global Condensate/(C+C) Ratio was about 10% in 2005 (partly based on an RBN Energy estimate that put the ratio at about 11% in 2010), and I assumed that global condensate production (a byproduct of natural gas production) increased at about the same rate as the rate of increase in global gas production, from 2005 to 2012.

    Based on these assumptions, global condensate production would have increased from about 7.4 mbpd in 2005 to about 9.0 mbpd in 2012, an increase of 1.6 mbpd, accounting for virtually all of the EIA’s reported increase in global C+C production from 2005 to 2012.

    Based on the foregoing, the global Condensate/(C+C) Ratio would have increased from about 10% in 2005 to 12% in 2012, versus 11% to 15% for Texas and versus 3% to 6% for OPEC.

  24. Jeffrey J. Brown says:

    And Chart #2:

    • SRSrocco says:


      Great charts, especially the second one. With a conservative 5% annual global decline rate at 73-75 mbd, the world’s drilling hamsters have added 3.5-4 mbd of new crude-condensate each year just to keep the phat lady singing.

      We can now see that the condensate (mainly from the U.S.) gets the blue ribbon. I would imagine it will become increasingly difficult to maintain that bumpy plateau of crude oil production (shown in your blue graph line) going forward.

      I believe CEO Dave Demshur is correct that global peak hits 2014-2015. When oil production starts to head south in the next year or so, on top the wonderful ongoing impact of Jeff Brown’s Land Export Model… the world’s financial system is going to experience one hell of an enema.


    • Coolreit says:

      Thank you Jeffrey for your continued contribution here!

  25. suedehead says:

    nice look at energy content of different fuels and the likelihood of eia predictions coming true


  26. SRSrocco says:

    This chart seems fitting for GOOD FRIDAY. It looks like the world’s atmosphere is now firmly over 400 ppm carbon. At this rate, we should remain above 400 ppm by 2018.

    Lastly, the chance of an El Nino this year taking place has moved up from 50% t0 66%… and it looks like it will be one heck of a whopper pulling record heat from the Pacific Ocean:

    Potential For El Nino Spikes As Record Pacific Ocean Heat Content Continues to Emerge


    Happy Holidays,


    • Aws. says:

      Thanks Steve, Happy Easter. Aws.

    • Are hurricanes ‘suppressed’ during an El Nino year?

    • Coolreit says:

      Plants and vegetation will flourish.

      Oh, and the world won’t come to an end!



      • The end of the world is already upon us, only it is as a slow-motion crash-test-dummy film.

      • SRSrocco says:


        When the delusional are delusional of the data… there’s not much that can be said.

        So, let’s just grab a bag of popcorn and see how climate events unfold.


        • Dave Ranning says:

          Yep a classic by Cool:
          The Dunning–Kruger effect is a cognitive bias which can manifest in one of two ways:

          1. Unskilled individuals suffer from illusory superiority, mistakenly rating their ability much higher than is accurate. This bias is attributed to a metacognitive inability of the unskilled to recognize their ineptitude.[1]
          2. Those persons to whom a skill or set of skills come easily may find themselves with weak self-confidence, as they may falsely assume that others have an equivalent understanding.

          • Coolreit says:

            When Dave Ranning also maligns a poster, it is also evidence of their weak arguments supporting their hypothesis. You said earlier that you are focused on the facts. Does that apply to facts about alleged global warming aka climate change? I recall you coming down hard on posters insulting other posters instead of their information? Again, I hope that thinking is a two-way street.

            • FunnelFan says:

              Please don’t respond to global warming is a hoax deniers. They are ignorant, can’t understand science that isn’t ideologically motivated, and get a kick out of peddling fabrications like climate change, the population bomb, the “Alar scare”, the Ozone hole will kill us all, and all the other cause célèbre issues that they’ve pushed the last 60 years. You just can’t reach or teach the willingly ignorant.

              • SRSrocco says:


                Excellent comment. Keep up the good work. By the way, weren’t you the one that said all we need is unbridled capitalism?

                Cheers to capitalism at all cost.


              • Watcher says:

                As I asked before . . . does anyone know if oil production spam is blasted onto climate blogs?

          • Coolreit says:

            Ditto for Dave Ranning

        • Coolreit says:


          When Steve calls people like me delusional, it is evident of their weak arguments supporting their hypothesis. You said earlier that you are focused on the facts. Does that apply to facts about alleged global warming aka climate change? I recall you coming down hard on posters insulting other posters instead of their information? I hope thatthinking is a two-way street.

          • SRSrocco says:


            Please take this into consideration. Before pulling out the POOR ME CARD, asking Ron to moderate something in my opinion.. quite silly, take a good look at the last word embedded in your link.

            To be objective here… we are both using the “delusional” word. The only difference, you won’t see me wasting Ron’s time on this issue.


            • Coolreit says:

              You called me delusional. The article I cited said the idea that the world was ending soon because of global warming was a delusion.

              And you know that!

              • SRSrocco says:


                Actually I was referring to the author of that article… Anthony Watts. It would never come across my mind to label you as delusional. Quite the contrary… you seem to possess more of an optimistic ideology, and that is a very positive attribute.

                Furthermore, if we could combine FunnelFan’s unbridled capitalism and you optimism… the sky would be the limit.

                Do you know what I mean?


  27. Old farmer mac says:

    The Obama administration has kicked the can down the road again.


    I have a hard time believing that very many more people are going to vote democratic because of this delay than are going to vote republican for the same reason.

    Of course this is about motivating the democratic green base rather than actually slowing down global warming because only a very naive or very poorly informed person could possibly believe that delaying or stopping this pipeline is going to slow down the rate at which we burn oil– including tar sand oil — to a significant extent.

    But it might result in the Chinese getting locking up a whole lot more oil if the pipeline is not approved because the Canadians will surely get that oil to market one way or another.

    The Chinese have plenty of ready money and are more than willing to finance a couple of new pipelines running to the west coast.

    The size of the goody bag is simply beyond resisting considering how many bennies the average Canadian citizen can expect to collect via the tax revenues.

    As I read the chicken entrails this is going to be a long term winner at the ballot box for the republicans.

    The middle of the road and mostly only mildly interested voter will see the dithering as pandering to the green wing of the democratic party after hearing about the state dept report and the right wing folks are pretty hot to see the construction go ahead.

    I am afraid this is the sort of miscalculation that is going to result in the republicans taking over Washington lock stock and barrel next elections.

    Good intentions must be matched by good execution or your party will pay the price.

    The Obama administration is good on intentions but not so hot on actually delivering the goods in a workmanlike way.

    • Lurker says:

      “The size of the goody bag is simply beyond resisting considering how many bennies the average Canadian citizen can expect to collect via the tax revenues.”

      loonies 😀

  28. Political Economist says:

    This is to follow up on discussion with Dennis on oil intensity. To make sure we’re on the same page, a few definitions.

    Oil intensity is the ratio of oil consumption over world GDP. Oil consumption is measured in tons of annual consumption (from BP statistical review of world energy). World GDP is measured in constant 2005 international dollars (from World Bank’s World Development Indicators).

    Real Oil Price per barrel is from BP statistical review of world energy, originally in 2012 dollars. To be compatible with world GDP, it converted into 2005 dollars by dividing oil price in 2012 dollars by 1.176 (the cumualtive US inflation rate between 2005 and 2012).

    The graph below shows the relationship between real oil price and oil intensity from 1980 to 2012. Real oil prices are measured in three-year trailing averages. For example, for the data point 2012, the real oil price refers to the average from 2010 to 2012. This is the same as in Dennis’s exercise.

    First, it should be noted that from 1980 to 1998, both real oil price and oil intensity tended to fall, possibly reflecting stagnating world economy, relatively easy subsitution of oil by other fuels (e.g., substituation of natural gas for oil for heating and electricity generation), and growth of supply capacity (North Sea, Alaska).

    From 1999 to 2012, there was a clear, downward linear relationship between oil intensity and real oil price. The question is how to project the trend into the future.

    The first approach (used by Dennis) is simple linear trend. Simple linear regression results in:

    Oil Intensity = 79.657 – 0.279 * Real Oil Price.

    R-square is 0.976 (very high). The result says that with zero real oil price, the “autonomous” oil intensity would be 79.7 tons per million dollars of world GDP. With each increase in real oil price by one dollar, oil intensity falls by about 0.28 tons. With an increase in real oil price by 10 dollars, oil intensity falls by 2.8 tons.

    The trouble is, simple linear regression implies unrealistically large declines of oil intensity in the future. Following the above trend, a real oil price of 300 dollars per barrel would imply an oil intensity of -4.1 tons per million dollars of GDP. This is clearly impossible.

    More realistically, one could argue that as oil intesity declines and some of the low hanging fruits have been picked, it may become more and more difficult for the global economy to reduce oil intensity. In that case, log linear regression would make more sense. A log linear regression for 1999-2012 produces the following result:

    ln (oil intensity) = 4.919 – 0.194 ln (real oil price)

    R-square 0.972, almost as good a fit as the previous regression. The above equation says that for every increase of real oil price by one percentage point, oil intensity falls by 0.19 percent. With the log linear trend, oil intensity would only fall to 45 tons per million dollars for a real oil price of 300 dollars.

    • Political Economist says:

      Now consider the implications for world oil spending as % of world GDP. World oil spending is defined as world oil consumption (annual consumption in tons is multiplied by 7.3 to be converted to barrels) multiplied by real oil price (in constant 2005 dollars). The real world oil spending is then divided by real GDP.

      The graph below shows the historical and projected world oil spending as % of world GDP. As the ratios shown belown are based on oil spending in real dollars, they are not comparable to ratios calculated from world oil spending in current dollars and the nominal world GDP. In 2008 and 2011, the world oil spending calculated in this way was about 4 percent of world GDP.

      For both projection 1 and 2, I assume that world real GDP will grow by 3% a year and real oil price will grow by 3% a year from 2013 to 2050.

      For projection 1, results from the above simple linear regression are used: for each increase in real oil price by one dollar, oil intensity falls by 0.28 tons per million dollars of GDP. For projection 2, results from the above log linear regression are used: for each increase in real oil price by one percentage point, oil intensity falls by 0.19 percent.

      Even for projection 1, world oil spending stays above 4% of world GDP and then collapses. For projection 2, world oil spending keeps rising and exceeds 6% after 2030. Clearly, long before world oil spending approaches 10%, it would force a prolonged global economic contraction which will take the oil price down to more sustainable levels.

      • P.E. I had a little trouble trying to figure out exactly what you are implying, but I think I may have it now.

        For both projection 1 and 2, I assume that world real GDP will grow by 3% a year and real oil price will grow by 3% a year from 2013 to 2050.

        Now we both that is impossible. GDP can only grow marginally if oil production stays flat. And GDP must contract if oil production contacts, which it most definitely will.

        Even for projection 1, world oil spending stays above 4% of world GDP and then collapses. For projection 2, world oil spending keeps rising and exceeds 6% after 2030. Clearly, long before world oil spending approaches 10%, it would force a prolonged global economic contraction which will take the oil price down to more sustainable levels.

        True, but if oil production contracts, which I believe it will, then the economy will continue to contract until it collapses.

        But if anyone else has a different scenario then I would love to hear it. But that scenario must have the oil supply contracting, else it is totally unrealistic. Of course if you do have the oil supply contracting and the economy flat or expanding, then that is equally unrealistic.


        • Political Economist says:

          Ron, thank for the reply. The purpose of the above exercise, in addition to evaluating the observed relationship between oil price and oil intensity, is to follow up on the discussion with Dennis. I’m re-posting Dennis’s graph below. I think his projection based on simple linear relationship between oil price and oil intensity leads to unrealistically low oil intensity by 2050 and therefore his suggestion that world economy could keep growing by 3% a year even with lower oil production.

          My above exercise intends to illustrate with a different assumed relationship between oil price and oil intensity (log linear), oil intensity would fall at a much slower pace even with rising oil prices. So that if world economy keeps growing at 3% a year and real oil price grows at the same pace as Dennis assumed, world oil spending would rise to unsustainable levels relative to GDP.

          On the relationship between GDP and world production, my position is somewhat between you and Dennis. I don’t think infinite growth of GDP under the condition of permanent decline of oil production is possible. But in the short and medium-term, it is possible for world GDP to grow by 2% or a little bit less with declining oil production based on the observed historical pace of oil intensity decline. 2% referst o the medium average. In some individual years, world GDP may grow 3% or more balanced by some other years when world GDP grows less or contracts.

          But 2% growth rate would probably be insufficient to ensure political and economic stability (rising unemployment).

          • Political Economist says:

            By the way, in many ways, “real” GDP is a fussy concept. It depends a lot on how the price indexes are measured for various economic sectors. This is especially problematic in various services sectors. For example, there is no generally accepted method on how to measure the “real” output of the financial sector. Healthcare, education, and government are all very problematic. These are big components of services GDP.

            In international comparison, world GDP measured in constant “international” dollars generally results in economic growth rates that about 1 percentage point higher than world GDP measured in constant US dollars.

            • Political Economist says:

              This is for Dennis. Dennis, just saw your detailed reply above. Thanks.

              Just want to bring it to your attention. BP publishes oil consumption data both in tons and in barrels. The oil consumption in tons refers to annual consumption. But the oil consumption in barrels refers to THOUSAND BARRELS PER DAY.

              Thus, if the oil consumption is daily consumption per day and the GDP refers to the total annual economic output, when you calculate the oil intensity, the oil consumption needs to be converted in some way (say, multiplied by 365).

            • Thanks P.E. I am preparing a post on this subject that will be up later this today or tonight. It will be based on the points of this very good video.
              Oil Supply and Demand Forecasting with Steven Kopits

              This video is the very best summation of the consequences of a constrained oil supply ever published. I thought it worth a post of its own.

              I hope everyone has watched it. I can’t imagine that anyone has not as much as I and so many others have been hyping it. Kopits’ points are supported by what is happening right now and I cannot imagine anyone trying to claim that they will not continue as the oil supply gets even further constrained.

              Yet some do. 😉

            • Dennis Coyne says:

              chart 2

          • Dennis Coyne says:

            Hi PE,

            I used a centered moving average, but I am pretty sure this would not affect the analysis in any significant way.

            It seems that both a regression on the log of oil intensity (using annual barrels rather than tonnes) vs the centered 3 year avg of real oil prices (from the EIA Real prices viewer) and the oil intensity vs 3 year avg real oil prices both give a trendline with a similar R squared.

            Not all declines are exponential in nature, though I would agree the exponential is more intuitive.

            I played around with the scenario using the log linear relationship and with a faster price increase and slightly slower growth in real GDP.

            Charts below

        • Dennis Coyne says:

          Hi Ron,

          Most liquid fuels are used for personal transportation. People can move on buses and other types of public transportation. A rise in prices will change people’s choices in transport. Oil intensity world wide has been falling and will continue to do so as prices rise.

          • Dennis Coyne says:

            No I am not right about that only about 20 MMb/d in 2011 for passenger light duty vehicles, roughly 25% of total.

  29. Old farmer mac says:


    Has anybody heard about oil near or in Anartica?

    I ‘m sure the cornucopians are confident there is plenty to be found under the icecap as soon as it melts. And by then space freighters will no doubt be commonplace and we can haul methane from the moons of Jupiter.

    I wonder if we could learn to live out our lives on small boats the way some people have in south Asia.

    I spent a few weekends on a crude hand built house boat owned by friends who used it for a weekend retreat.

    It wouldn’t be as bad as being on an old time whaling ship. You could find some dry land and get off and stretch your legs once in a while.

    • Old farmer mac says:

      I forgot to mention it but the above link does have a remark about the Russians needing this new offshore oil to offset depletion of their big Siberian fields.

      The peak oil message is gradually beginning to make its way into the mainstream consciousness in a roundabout fashion.

      • Watcher says:

        The reserves numbers in the wiki are what they are, with the middle east quoted to have far more than that enormous Russian land mass.

        The big Russian shale deposit is claimed to have about 80 billion barrels. The Middle East claims hundreds of billions. Russia Arctic offshore reserves are mostly quoted in BOE so hard to compare with the Middle East.

        As for messages, it’s pretty important to see that people don’t get up in the morning to go to work and lie. Getting numbers to say what you want requires work at rationalization. It happens. Every day. But a wave of a hand and instructions to staff to go out and lie is not the way it happens. You offer up a new parameter or you redefine a parameter in some subtle and quiet way and you’ll see that there is little resistance to it.

        Who, other than bond holders, objected to the administration pressuring the court to re-order the statute defined priority of asset distribution in the GM bankruptcy? The creditors of GM were erased. The unions, not in any way even mentioned in the statute, were awarded assets. The statute was redefined.

        One does wonder, btw, if all the governments of the world use the same API definition of “oil” that the EIA does domestically? The EIA just takes their quote and adds it to the total.

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