The recent price crash in crude oil, if it lasts for any length of time, will certainly affect oil production. The question is, just how great an effect will it have an how soon? But in this post I want to concentrate on what is, or was, happening to world oil production even before the price crash.
Russia, the largest producer of crude oil in the world, will peak in 2014. There are various estimates of how fast their production will decline but best case, for Russia, puts their decline at about 2% per year. They say they are depending on the Bazhenov Shale and Arctic offshore just to keep production flat in 2015. Well that is not going to happen, not in the next few years anyway. And if prices stay in the current range it is unlikely to ever happen.
OPEC is a wild card but there is little doubt that they are producing flat out right now. Only Iran has any real any real chance of increasing production very much and that only if sanctions are lifted. Libya has already increased production significantly and could increase more but very little. With the violence still going on in Libya, there is a greater chance that their production will decline.
But before we go any further let’s look at what the EIA is predicting for 2015 for both the USA and the rest of non-OPEC? The below charts are from the EIA’s Short-Term Energy Outlook. Current data is through October 2014 and the projected data is through December 2015. All data is in million barrels per day. Also, very important, the data is Total Liquids which includes NGLs, bio fuels and refinery process gain. The EIA, for US production even counts refinery process gain on imported oil.
The EIA is predicting US average production total liquids will be up 1.49 million barrels per day in 2014 and up another 1.1 mbd in 2015. (I always use m for million and k for thousand.)
The EIA is predicting non-OPEC average total liquids will be up will be up 1.88 mbd in 2014 but only about half that, up .95 mbd, in 2015.
By removing the US we get an entirely different picture. The EIA has non-OPEC total liquids, less US, up .39 mbd in 2014 but down .15 mbd in 2015.
We get a slightly better picture by looking at annual production instead of monthly production.
It is a little easier to see the EIA is predicting US production growth will slow slightly in 2015.
That same slow down of growth is apparent in their non-OPEC total liquids prediction.
The EIA is saying that they expect that non-OPEC total liquids outside the USA will decline next year.
This chart is Crude + Condensate and the data is through July 2014. I show it to emphasize the point that only the US is keeping the world from peak oil. And what you see above is many nations that have improved production in the last 5 years or so but have now peaked. Only a couple of non-OPEC nations will increase production next year and those by only a tiny amount. Most nations will see a decline next year.
But what will happen to US production? The price decline will most definitely affect production but how long will it take for that decline to show up? After all at the end of September there were 610 Bakken wells awaiting completion. That is a three months supply. That means any slowdown in drilling will take several months to show a decline in wells completed. However elsewhere it may not take nearly that long.
When the price collapsed in 1985 the decline was rather dramatic. However the price collapse in 2008 led to no noticeable decline in either US or other non-OPEC production. There was a huge decline in OPEC production in 08 and 09 but that was a deliberate cut.
I believe non-OPEC production less US production will be down between .5 and 1 million barrels per day next year. And I believe it unlikely that US production will be able to offset that. OPEC is still the wild card but I think it is more likely their production will decline rather than increase.
Bottom line, it obvious that we are on the cusp of peak oil and only the seemingly ever increasing barrels from US shale oil production is keeping it at bay. But it now looks like that party is about to be over. I think that it is very likely that peak oil has already arrived, if not this year then 2015 for sure.
For clarification: Peak oil for me is when C+C peaks. I do not count bottled gas and bio-fuels as oil. I would like to exclude condensate but no one except OPEC, Mexico and Norway gives up “crude only” stats so we are forced to count Crude + Condensate. I posted the EIA’s “total liquids” charts here because they make no predictions for C+C and the data they do post only goes through July 2014.
In other news: Things are getting tough all over for those financing the shale oil patch. They are starting to dump assets to pay their bills. They are caught in a squeeze between falling oil prices and rising junk bond rates.
Exclusive: KKR prepares more Samson asset sales as oil prices plunge
KKR & Co which led the acquisition of oil and gas producer Samson Resources Corp for $7.2 billion in 2011 and has already sold almost half its acreage to cope with lower energy prices, plans to sell its North Dakota Bakken oil deposit worth less than $500 million as part of an ongoing downsizing plan, according to people familiar with the matter.
KKR, one of the world’s biggest private equity firms with $96 billion in assets under management, overpaid for Samson, and persistently low natural gas prices have hampered its ability to finance the company and added to its debt burden, the people said. KKR’s plan was to shift Samson’s assets from natural gas production more into oil and liquids.
With U.S. crude oil futures down 25 percent since June, Samson has hired Bank of Nova Scotia to sell the Bakken assets, and the company is contemplating more asset sales to raise cash, the people said, without specifying which other assets…
“Everyone wants to be near the ‘sweet spot’ where the reservoir produces the most liquid and a higher concentration of hydrocarbons per square foot,” said Allen Brooks of boutique investment bank PPHB LP.
And those ‘sweet spots’ are starting to get a little less sweet with every new well.
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It always comes back to jevon’s paradox… The more we have, the cheaper it is to use, the more we will use.
A drop in high efficiency car sales and increased travelling has likely already begun in response to lower prices at the pump.
The changes in consumption will be reflected more obviously over time. It’s not as if there aren’t already billions of masses out there who aren’t interested in living “better”…
This is probabaly just another “dip” on the peak oil curve.
The immediate question is how much financial engineering took place expecting $100 oil and how will this pendulum swing affect the global currency systems. A hard crash of some kind?
It will be interesting to see how U.S. oil consumption responds to U.S. oil-derived products’ prices over time.
I wonder about the facile invocation of Jevon’s Paradox…it is easily tossed out on the stage in this and other forums to nay-say the advent of more fuel-efficient vehicles (and better energy efficiency in general) and now it is invoked as the bogeyman rearing its ugly head in response to lower oil prices.
Analysts learn to broaden their scope to try to understand all the potentially relevant factors in play in any analysis, not just the premier attribute that hangs in the air in front of them like a bright shiny bauble.
In this case, the ‘My Precious’ is the easily understood and oft-reported gasoline price at the pump.
What about other factors which may influence the vehicle miles traveled (VMT) per unit of time?
Do people have jobs? DO they have well-paying jobs, affording them significant discretionary income? Do they choose to spent some, most, or all of there discretionary income on things other than increasing their VMT (including from a zero baseline)? Even if they thought they might achieve higher marginal utility from increasing their VMT as opposed to other uses of their spare nickels and dimes, do they have that other ‘master’ precious commodity: time? Are they working overtime on their job, or maybe working multiple jobs to make ends meet and have a few ducks left over?
Can they afford car insurance? Car Maintenance? Registration and Licensing fees? Traffic violation fines?
How many places can they go that they haven’t seen before in person, or have seen non TV or the Internets, or that don’t have the same scenery and attractions that are in there back yard (McUrbanization/standardization of the U.S.) or that interest them, or are worth the hassle of time, traffic, parking fees, entry fees, lodging expenses, eating out on the road, etc? Do we propose that instead of going to WallyWorld or the nearest National Parks ($$$), ($$$), exclusive of gasoline even, that they go cruise the downtown loop, a la the 1960s and 1970s?
Let’s face it…I am talking about the elasticity of demand for oil wrt private motoring. I know folks, real well, who make in the low to mid $100Ks, who could easily afford to travel more, even before this recent price reduction in gas, who travel less than ever, due to being busy with their work, family, etc. and due to having been up the mountains and down the valleys more than a few times…for these people, their step-up traveling aspiration isn’t to drive up to Santa Fe or down to Carlsbad for the umpteenth time, it is to see New Zealand, take that dream Alaskan cruise/railway adventure, etc…but these things are too spendy, even for folks who make the low hundreds, but have big long mortgages and don’t feel they can take the time away from the almighty job, lest their slow cog gets replaced with a shiny fresh sprocket. And for the folks who are not fortunate enought to have these upper-middle-class woes…well, they are likley working multiple jobs and can’t even fantasise about driving to Santa Fe and looking at the art or Carlsbad and looking at the natural wonders, even if that interested them to begin with…thay probably want to see Hawaii and Alaska too, and are even further away from that dream than the UMC folks who are working their fragile, tenuous 70 hour week white collar jobs just to stay even.
IIRC, OFM posted some posts about elasticity of demand for oil, and, IIRC, I think the data, such that it is, shows that demand is sticky.
In sum, I perceive that Jeveon’s Paradox is not as big of a deal as some folks think.
I believe that Jevons Paradox applies to oil if the time frame is sufficiently long to allow people to change their lifestyles and habits to accommodate themselves to either substantially cheaper or substantially more expensive oil.It applies if you are talking decade scale no doubt.
But I don’t believe it matters much if at all in the short term, meaning a year or two.. We have to do most of the driving we do and we just don’t start driving a whole lot more because gas prices come down- at least not right away.
Certainly there are people who will buy a larger car or truck today than they would have six months ago – but not THAT many more – and most people are not going to be buying a new car at all.
Beyond that a brand new ’15 model f 150 which is considerably larger than some older pickups will actually get better mileage. I have an elderly Chevy 4×4 S10 that will not get the mileage the larger new 4x4f150 will get.
I’ve been looking at this drop in prices from the perspective of it simply putting a hundred dollars per month or so into people’s pockets. Somewhere else I read this as being the equivalent of QE4, but directed at the masses instead of the bankers.
So people will choose to either consider it a kind of pension and go out to buy that F150, pay off some bills or start a savings plan. Some choices will make them poorer, some richer. In either case it will be a world wide stimulus. What we can hope is that net-net the largest portion will not go to increasing the purchase of less energy efficient “toys” but to purchases that will actually enhance people’s futures.
OFM,
I think you are correct…I think that all but the stupidest people remember how gasoline prices have waxed and waned repeatedly in the past, and at least have a dim understanding that gasoline prices very well may increase again.
On top of that, even the hard-core tune-outists (people who live their lives from one TV show to the next) have a sense of profound economic uncertainty…uncertainty in continued employment, in whether their car will hold together, whether they will face a profound medical bill, the frig might crap out, their parents may need nursing home care, their kids may need some help, and on and on and on.
There are many variables floating around in peoples’ noggins besides the day-to-day price of gasoline…most of these variables have big potential downsides and thus constrain peoples’ behaviors, and thus you are correct in surmising (IMO) that gasoline elasticity of demand is pretty sticky over the course of at least a year or two.
In the bigger picture, this widespread profound uncertainty, backed by real economic constraints for most people, puts a lid on ‘economic growth. Besides that, even people of limited means probably have all the big screen TVs and smart phones that they can use. There is only so much food you can eat…witness the obesity situation…there are only so many hours in a day…there is only so much information/services/products a person can consume, even if they had more money.
Two large factors: 1) People are financially constrained and 2) even if they weren’t, they are constrained otherwise…people are ‘full’…like after finishing their Thanksgiving plate…their houses and apartments don’t have any room for more stuff, and more stuff has stopped making most folks feel any better.
It would be swell if society redefined ‘the good life’….Peak Consumerism arrived a while ago. Peak video games, peak TV shows, peak sports viewing, peak UTube vids, peak restaurants, peak motels, etc. More =/ better and/or happier.
Shuffling along, your thoughts mirror mine.
Everything in our world reeks of excess, of oversupply, of hubris, of a system gone out of control.
Where you see excess I see poverty. The picture popped up in my facebook feed today. People standing in line waiting to buy cheap electronics.
What strikes me is how unpleasant public spaces are. They are so fixated on getting a TV screen with an additional inch diagonal that they don’t notice they are living in the third world.
Where you see excess I see poverty.
I certainly do see the excess but I also see the poverty, a profound poverty of spirit and imagination. That line in a way, is reminiscent of a line leading to a soup kitchen during the depression. It also makes me think of junkies lining up to get their fixes from their corporate pushers. These poor
peopleconsumers have been profoundly brainwashed but somehow I just can’t really bring myself to feel sorry for them anymore…I deal with these people every day and I find them to be just as Arrogant, greedy and petty as our so called leaders. Ours has to be the most dystopian civilization that has ever existed!Cheers!
More to the point of this blog, low density car based societies are going to be at a distinct disadvantage if oil runs out. Cities that have invested in the infrastructure needed for high density living arrangements have much lower fuel costs.
A drop in high efficiency car sales and increased travelling has likely already begun in response to lower prices at the pump.
If the US really aims to be energy independent, the pitch should be that we scale back oil consumption so that we only use what we produce from local wells.
I expect the market is somewhat asymmetrical. The drop in price is going to cause a lot more damage in the short term to the supply side than it is going to cause any structural change on the demand side.
It’s easier for a few drillers to go bankrupt than it is for consumers to buy a whole new fleet of cars.
I nominate this comment as the best individual comment I have seen here is some time.
”It’s easier for a few drillers to go bankrupt than it is for consumers to buy a whole new fleet of cars.”
There is a LOT of food for thought in this one sentence when it comes to figuring out what may happen to the economy over the short to medium term.
Thanks 🙂
” But it now looks like that party is about to be over. I think that it is very likely that peak oil has already arrived, if not this year then 2015 for sure.”
Ron,
Bold words. From a lesser thinker I’d probably just gloss over them.
This recent price collapse is interesting. It has the potential to burst the shale bubble and or destabilize other oil exporters relying on oil prices to placate the masses.
The last 5 years of so have been rather dull on the peak oil front. Things might just be getting interesting again.
The last 5 years of so have been rather dull on the peak oil front. Things might just be getting interesting again.
Things have been dull for some but not so dull for others. I have watched major national oil companies skim the cream from the top of their old fields in an effort to increase production, or at least keep it flat. And I have wondered why all those prognosticators who have declared the death of peak oil cannot see what was happening. The high price of oil enabled some US drillers to squeeze a little oil from source rock that was too tight to fool with at lower prices. Then with US production increasing by over a million barrels per day per year, everyone celebrated the death of peak oil.
No, I found the last few years extremely interesting, and now things are about to get even more interesting.
Ron, et al.,
If one looks at the proportional aggregate rate of real GDP per capita for 65-70% of the world economy (US, EZ, Japan, and China), “stall speed” occurred in Q4 2013-Q1 2014 and has decelerated to a rate historically occurring at the onset of recession. The same pattern occurred in winter-summer 2001 and 2008.
The US has appeared to “decouple” because of the debt-induced shale oil boom/bubble and associated growth of energy-related transportation that has skewed US industrial production higher than otherwise would be the case. Also, subprime loans have been driving (bad pun) growth in auto sales, without which sales would be 11-12 million instead of 16 million. Subprime auto loan delinquencies and defaults have already begun to rise, and one can imagine a similar event occurring in the shale oil sector, which will eventually hit banks that have grown rapidly commercial and industrial loans in the energy sector.
Moreover, note that the US stock market was a lagging indicator of the economy in 2001 and 2008, crashing 2-3 quarters after the economy had already entered recession in late 2000 and late 2007.
Finally, the crash in the price of oil in 2008 occurred in part because of the unwinding of long leverage in oil futures in response to the recession-related slack demand conditions occurring throughout 2008, as is occurring today around the world.
I’ll reiterate from a week or so ago, Peak Oil occurred in 2005-08, at least in per capita terms. Peak Oil likely occurred in absolute terms in 2011-12 with the increasing energy cost of extracting energy becoming prohibitive; or the fossil fuel energy cost of extracting the marginal costlier barrel reaching a threshold at or above which it is no longer economically feasible to continue growing investment to extract, transport, refine, store, distribute, etc.
Put another way, we can’t afford to profitably extract oil above $40-$50 AND grow real GDP/final sales per capita so that demand is sufficient to continue extracting the costlier, lower-quality oil. This implies that neither can we afford to build out renewables at necessary scale AND grow real GDP/final sales per capita AND simultaneously maintain the fossil fuel infrastructure indefinitely.
We are likely to see global demand for energy and goods and services constrained sufficiently hereafter, even at the oil price in the $40s-$50s, while production declines with the lower price of oil and decelerating or contracting real GDP/final sales per capita as the long-term secular trend hereafter.
This is the definition of Peak Oil and “Limits to Growth” (LTG), and we’ve been at or near the log-linear limit bound of LTG since 2005-08.
What is required now is for corporate, financial, and political leaders, and mass-media influentials to “get it” and publicly begin without delay the process of mass-social conditioning of the population to the imperative to transition from the oil-, auto-, debt-, and suburban housing-based economic paradigm to one of efficiency, conservation, and a steady-state economy and policies that ensure a socially acceptable material standard of reduced consumption per capita and maintenance of well-being for as many people as possible.
“The market” (including gov’t enabling) will not accomplish this by itself, if ever; rather, it will do what it does best: respond to price, profit, and tax incentives to efficiently concentrate resources, income, wealth, and political power to the top 0.01-0.1% to 1% owners of the means of production while marginalizing the bottom 90% working-class masses and rewarding for their acquiescence and compliance the next 9% professional middle class below the top 1%.
The policies that enabled the Oil Age, and from which most of us benefited, must now be transformed to adapt successfully to the post-Oil Age epoch hereafter. The task will be extremely challenging, to be sure, especially when a large majority of leaders and the public do not understand Peak Oil and LTG, and the implications. There is every incentive for those benefiting the most from “the market” to ensure that we do not understand.
Very good summary. Ta.
Hi Patrick,
I agree that the thesis is interesting and I believe it describes what must happen in the future. However IMF GDP data in purchasing power parity (PPP) terms and constant 2005 international $ along with UN population data, suggests that GDP per capita has not stopped growing over the 1980 to 2012 period. The average growth rate of GDP per capita (in 2005 $ using PPP measure) has been 1.8% on average over the period. Wealth has been concentrated at the upper income levels in the US over the period, but it is not clear if this has happened worldwide. Chart below.
I agree. The best summary of what has been happening that I have read anywhere.
The policies that enabled the Oil Age, and from which most of us benefited, must now be transformed to adapt successfully to the post-Oil Age epoch hereafter.
I’ll add this link. http://www.nytimes.com/2014/12/01/world/climate-talks.html?partner=rss&emc=rss
Some people close their ears when confronted with global warming, but if they are presented with the above thinking instead, maybe their behavior will head the right direction for economic reasons. They may think they can ignore global warming, but if it finally dawns on people the realities of peak oil, they might start to phase it out.
Excellent! I would add the requirement that it is IMPERATIVE that we get off ff’s to preserve the biosphere for the next generations. Which means of course, we have a severely limited budget remaining. And so, to use Ugo Bardi’s analogy, we have to quit eating that seed corn and instead plant it to grow renewable sources, mainly solar.
We all know about the auto industry after Pearl Harbor- they quit private cars NOW, and went on to war production. I kept our 37 chevy running by ripping off the copious supply of car corpses littering the landscape- as did everybody.
There’s enough stuff in everybody’s garage to keep us going fine for the time needed to get up to speed with solar. And everybody would be happier without all that crap. Hurt the economy? The existing economy should be not just hurt, but executed for crimes committed. BAU is insane.
Also, I believe it is possible to sidestep the barrier of the existing blind power structure by starting with the small but growing community of those who will in fact do what is needed right now without coercion. I know lots of such people, and am striving to knit them together in this small community- with some success so far.
Hurt the economy?
The changeover to renewables should create quite a few jobs, which would then put more money into consumers’ pockets. There would probably need to be some debt and government financing to get things going, but the result shouldn’t be more expensive than fighting wars, and should produce far greater benefits for the economy as a whole.
The changeover to renewables should create quite a few jobs, which would then put more money into consumers’ pockets.
I find such wild optimism truly comical.
OK, Ron, I hear you. So what’s your solution? Keep up the insanity?
Just who the hell told you I had a solution?
OOPS! Sorry, Ron. Shouldn’t have put it that way. I knew full well that you didn’t pretend to have a solution.
Thanks for all the good work you do with this site.
Long time readers of your writing already knew you do not have a solution or pretend to have a solution. Some might see increased U.S. production as a reprieve, as some additional years to confront the reality of peak and declining oil production. Well, we will be too buy luxuriating orgasmically in the arrival of cheap gas to think about such unpleasant things as the temporary nature of this phenomenon.
For the first time ever, Honda CRVs are outselling civics. Yes, that is better than large SUVs outselling civics but it perfectly illustrates the fact that no learning has occurred nor will it occur.
I find such wild optimism truly comical.
We’re paying people to fight wars. Supposedly the pipeline will supply jobs. So put those same people into post-oil jobs.
The neglect of American cities would be equally comical if it weren’t such a tragedy. America has missed vast opportunities in the last couple of generations.
Transitioning fully to the ‘renewable utopia’ that most reports seem to posit is possible rests largely on the assumption that we have a functioning economy and access to large amounts of cheap energy and cheap building materials for the next 2-3 decades. The energy of all these things is front-loaded, so you need to have lots spare to invest. Plus they never seem to consider the various tipping points in grid saturation that they’re likely to reach. The implitic assumptions in most of these scenarios are entirely unrealistic when viewed through a peak oil/peak net energy lens.
I cringe when someone starts their comment with a loaded term such as ‘renewable utopia’ then goes on to talk about strawman arguements against implicit assumptions and doesn’t for a moment consider their own implicit assumptions that the current, wants are more important than needs, paradigm will also continue for ever… Trust me on this one, there will be a drastic change in that particular paradigm much sooner than later. People will quickly come to terms with simple realities such as no one NEEDS 24/7 neon lights!
Cheers!
I don’t see how the requirement of access to a functional economy to do a renewable buildout is a “strawman”, but whatever. I think you’re expecting more from human psychology than is likely to happen. People tend not to settle for less happily.
I don’t see how the requirement of access to a functional economy to do a renewable buildout is a “strawman”
That isn’t the strawman part. The strawman is the assumption that everyone who talks about renewables is still stuck in BAU paradigm. BAU by definition is dead and only a delusional imbecil would expect a future civilization based on renewables to be a utopia if our current profligate use of energy is to continue unabated. There exists a growing number of people who are thinking completely outside the BAU box. These people are schooled in systems thinking and have a pretty good grasp on both the physical and the social sciences. I posted this link the other day and I’ll post it again here to underscore at least one concrete example of the kind of synergy I’m talking about.
http://bfi.org/ideaindex/projects/2014/living-breakwaters
The strawman is the assumption that everyone who talks about renewables is still stuck in BAU paradigm.
Yes, that is the point. Renewables won’t have to power the same lifestyles that we have now. A lot will be eliminated. But that isn’t bad.
People don’t need to live in big houses. They don’t need to drive big cars and have one car per adult. They don’t need the current commercial airline system. They don’t need agriculture to produce corn for corn syrup, ethanol, and animal feed, and so on.
Business as usual isn’t sustainable. That doesn’t mean nothing is sustainable.
I cringe when someone starts their comment with a loaded term such as ‘renewable utopia’ then goes on to talk about strawman arguements against implicit assumptions and doesn’t for a moment consider their own implicit assumptions that the current, wants are more important than needs, paradigm will also continue for ever
That’s the point. We’re using the energy now. We’re using oil, gas, and coal to keep business as usual. We are employing people for business as usual. We are paying people to build gasoline cars, fight wars, grow corn for corn syrup, etc.
So I can’t see how making the switch over to renewables would be any less doable than what we are doing now. If we are keeping the world afloat now via energy use, why is it not possible to swift how that energy is being used, what is being built, and what jobs people are being paid for?
China, for example, has used lots of cement to build projects no one wants. Why continue with that?
Republican propaganda has done well in America. It started in the Nixon White House with the CREEPs (the committee to re-elect the president). They introduced the psyops methods developed to overturn Castro into American political discourse.
The Republicans hate the idea of reducing pollution or energy consumption, so half witted strawman arguments about “greens” have been programmed into people’s brains. Nobody even notices any more. They think it is polite, well-reasoned commentary, like funny nicknames for Obama. You should see my facebook feed.
Plan Outlines Low-Carbon Future for Germany
By DIANA S. POWERSNOV. 30, 2014
AMSTERDAM — Scientists have developed a comprehensive computer model that simulates German energy supply and demand, in a bid to establish whether it is feasible for Germany to rely on renewable energy sources to power its economy and meet its carbon dioxide emission reduction targets.
Developed by Hans-Martin Henning and Andreas Palzer, two physicists at the Fraunhofer Institute for Solar Energy Systems, in Freiburg, the Renewable Energy Model-Deutschland, or REMod-D, is a computer simulation that models an all-sector future energy system for Germany, matching supply and demand on an hourly basis over a full year.
Using real data from 2011 and 2012, the researchers have run millions of simulations to optimize the model. They say they have demonstrated that there are several economically viable ways to achieve a low-carbon future, using existing technologies.
“We wanted to answer the question: Is it possible for Germany to meet its ambitious CO2 reduction target using predominantly renewable energies?” Mr. Henning said in an interview. “And, if yes, what is the composition of this system, and what is its cost?”
The answer to the first question is an unequivocal “yes,” according to Eicke Weber, the institute’s director and a professor of physics at Freiburg University.
http://www.nytimes.com/2014/12/01/business/energy-environment/plan-outlines-low-carbon-future-for-germany-energy.html?mabReward=RI%3A6&module=WelcomeBackModal&contentCollection=Opinion®ion=FixedCenter&action=click&src=recg&pgtype=article
A certainly long posting. The short view from Kiel:
http://www.geomar.de/index.php?eID=tx_geoweather_webcam&webcam=foerde-large
Once again. For the money the Germans have already thrown at solar, while still toasting scads of coal, as seen in Kiel, they could have built out the entire French nuclear fleet.
Oh, my! Why haven’t we done this years ago? Such easy!
The Germans bought the world cheap solar. Thanks to their investment, the prices have crashed. News items like this are getting more and more common
http://cleantechnica.com/2014/11/29/dubai-shatters-solar-tariff-records-worldwide-lowest-ever/
It’s a done deal. The prices will continue to fall. There’s no point whining about the cost, because making renewables cheap was the main goal of the program in the first place.
The question now is not whether solar is a “good thing”. The question is how will the rest of the market react to it being the cheapest source of energy , which it is likely to be in the 2020s (if wind doesn’t beat it).
Currently the electricity market is dominated by “baseload” generation. These are inflexible cheap plants that produce 24/7 and make money by overcharging during the day.
Solar and wind have already killed these plants in Germany by forcing them to pay the grid to take their energy (because the plants can’t be shut down). The utilities are abandoning them. So the supposed weakness of renewables is a bigger problem for the non-renewables.
Negative electricity prices are already commonplace in Germany. An interesting business opportunity.
Ho, victory laps for solar? When humanity has not even hardly begun to think how to kick the Carbon habit, and does grow that faster than these renewables? Interesting. Some might even say, premature. But do carry on. You were saying something about the Chinese coal burn, I believe?
Wow, Nick, that is a super good quote, and I am gonna send it around to my local renewable energy group right now. This is really heavy ammo.
Now, how come the Germans keep acting as if they are using their brains, and we keep acting like we don’t have any??
Did we ship them off to Sweden with our garbage that they get from us to turn into their electricity?
The Germans also import millions of tons of garbage a year for incineration.
It’s amazing to me they talk about possible gas shortages in the Northeast while exporting vast quantities of perfectly good fuel to be dumped.
Especially when you read stories like this:
http://www.heraldonline.com/2014/11/06/6501925/chester-landfill-fire-has-turned.html
Hi Nick,
Please don’t quote an entire article, post the link and take out the most important excerpts, just a few lines. Thanks.
Note that when a comment is too long many people don’t bother to read it. I am guilty of this error, quite often.
Thanks Dennis, I have shortened the article considerably. Left the link so if anyone wishes to read the entire article they can simply go there.
I don’t really worry about copyright infringement but quoting the whole article, when the article is very long, is just foolish. It just takes up way too much space.
One thing I always think is missing in these analyses is an investigation into how we get from where we are (large stable grids supplied by centrally generated electricity from spinning sources based on burning stocks when we need them) to where we want to be (distributed grids powered largely by sources which we cannot turn off and on at will).
Transitioning from one to another there are going to be various feedbacks and tipping points as we try to affect system change. Has anyone analysed those, tried to model how a transition would work? The current UK grid operator has said that they’ll struggle to balance the grid with 30% wind penetration. Since economic grid scale storage is presently a nonexistant technology, how are we going to get to these various targets without impacting stability?
The issue of lock in in complex systems is quite a real one and probably constrains the paths which are realistically available to us.
Hi Sam,
One possibility is to build excess capacity in wind and solar with some spinning backup powered by natural gas, a study at the University of Delaware in 2011 showed that such a system can provide up to 90% of load hours at low cost, backup can eventually be provided by batteries, fuel cells, and vehicle to grid (or the lowest cost combination of these three). Any excess energy which cannot be used for heating, recharging batteries, creating hydrogen for fuel cells or pumping water uphill for use in hydro dams can simply be dumped to ground. There is plenty of capacity in the grid to move the distributed power around and if not grid capacity can be expanded where needed.
The study was in 2012 not 2011, blurb at link below:
http://www.udel.edu/udaily/2013/dec/renewable-energy-121012.html
Study at page below (pdf link in upper left corner of page):
http://www.sciencedirect.com/science/article/pii/S0378775312014759
From the abstract:
We find that the least cost solutions yield seemingly-excessive generation capacity—at times, almost three times the electricity needed to meet electrical load. This is because diverse renewable generation and the excess capacity together meet electric load with less storage, lowering total system cost. At 2030 technology costs and with excess electricity displacing natural gas, we find that the electric system can be powered 90%–99.9% of hours entirely on renewable electricity, at costs comparable to today’s—but only if we optimize the mix of generation and storage technologies.
Dennis,
I’ve read that study, and it was interesting (I disagree with some of their assumptions though), however it basically represents an “end state”, that we desire to move our system to. I’m more talking about how we get from here to there without hitting any tipping points (if there are any) in the operation of the grid in the interim. An example being how does the UK get past the 30% wind integration in the grid without significant stability issues.
Similarly, in that study, the end state looks stable, but how do things function when only half of the renewable capaicty is built and there’s no storage available, what do you do if different technologies become available later than you planned for. If you have long periods of instability, presumably that impacts whether or not the final grid ever gets built, etc. The current approach in Germany seems just to involve throwing shit at a wall and seeing what sticks. I’m not sure that it’s the best way to get a stable transition because of the potential for nonlinear response.
Here are some thoughts:
Variance isn’t the same thing as unpredictability/unreliability. Wind output can be predicted to a large degree, which allows planning, and reduces or eliminates a need for spinning reserves.
As we add multiple windfarms, presumably with output either non-correlated or only partly correlated, the ratio of variance to mean output falls sharply. Also, many windfarms are negatively correlated, so that careful site selection reduces system variance.
Geographic balancing between parts of the grid only requires transmitting balancing amounts, not the whole load. A cost optimized grid will not have world-girdling, massive transmission lines.
Only a small % of a region’s wind power would need to be transferred between regions in order to provide balancing, and possibly not as far as one might think. Sometimes it’s just a matter of a number of sub-regions getting their power, on average, 100 miles from their west, rather than 100 miles from their east, and in effect you’ve transferred power from the western edge of the overall region to the eastern.
We really don’t need much more peak capacity – perhaps none at all for many years, with good time-of-day pricing and DSM. That renders most of this argument moot, at least as a boundary: we can use existing generation if we have to as a backup.
Wind farm peak capacity credits are a little like getting a dog to talk: the interesting thing isn’t how well the dog talks, but that it talks at all. The fact that even a small cluster of wind farms can have a 1/3 of average capacity credit, or wind at a regional level have an average 55% credit, is important.
I see local wind capacity credit as solving roughly 40% of the diurnal intermittency problem; long-distance transmission solving about 30%, and DSM solving the rest. DSM alone could make an enormous contribution: think 220M EV’s (with 2.2TW peak demand or output) doing a dance of load balancing with the grid. This doesn’t even touch the legacy peak capacity which could provide backup – this we’d want to minimize to minimize CO2 emissions, but that wouldn’t be hard with DSM as a short-term factor: we’d only need it for very unusual, long-term lulls.
Biomass would be enormously useful for grid stability. Biomass is an obvious, and workable, candidate for the job of providing backup for seasonal lulls in wind & solar production. OTOH, it’s not necessary.
Solutions for seasonal lulls in renewable production include overbuilding; production of hydrogen, ammonia, methane or other synthetic hydrocarbons with surplus electricity; compressed air storage; pumped storage; nuclear; overbuilt geothermal; etc, etc, etc.
There are a number of workable solutions to intermittency. Some are cheaper than others, some combinations are more optimal than others, but there are wide variety of ways to skin this cat.
Electric vehicles can be built in the same factories that made ICEs, and with the same people. Wind turbines can be built instead of coal plants, and coal miners could install turbines and solar panels.
The transition to renewables would provide all the employment needed to replace Fossil Fuel industry employment.
The problem: there would be winners, and losers. There would be more winners than losers, but the potential losers are fighting far more desperately than the prospective winners.
And this orgy of consumption as usual would accomplish…what? I walked past nearly a mile of double-lane fulls of traffic going, well, nowhere last night. This is not uncommon. The sidewalk was wide open, aside from a few bicyclists, a USPS truck (engine idling), three dogs, and four other pedestrians, two of whom illegally jaywalked across the road (the beg buttons are a rather long ways away). Shiny car man was beeping at the car ahead of him for presumably not zooming around me as I crossed by the corner sushi place. Good fun. I hear there was possibly some collision or whathaveyou on that giant expensive single point of failure that is I-5. So. Assume the relaunch of the electric car is somehow viable for The Billions as claimed. Then what? Folks sitting around, still going nowhere? Oh, Progress! What, widen the roads? Hey, hey, they dropped a cool billion into the I-405 expansion—ease that beltway out a few notches, yep—and travel times are…slower!
The losers of this mindless car consumption would include, I don’t know, Allison Liao.
Add a “Collision Avoidance” system.
https://www.youtube.com/watch?v=0tiHwzGsotA
Actually the solution to a lot of problems in American infrastructure would be to narrow the lanes in the existing roads and increase the number of lanes, or simply ban large vehicles and vehicles without riders from using all but a single lane.
One problem with SUVs is they waste oil, The obvious solution is to tax oil. The other problem is they are road hogs. The solution here is either road pricing or simple bans.
Another problem related to the fetish for oversized vehicles is parking lots. A third of urban America is parking lots. Add this to another third taken by roads and you realize a lot of the driving you do is driving past car infrastructure. Since local government has failed, it will take a federal tax on surface parking to eliminate the plague of free parking.
I think it would be better to keep the lane width, and introduce more narrow vehicles that can split a lane.
http://www.commutercars.com/
Yeah John B, But nobody really has an incentive to drive them unless there are special lanes for them. It’s a good idea though.
Also, I believe it is possible to sidestep the barrier of the existing blind power structure by starting with the small but growing community of those who will in fact do what is needed right now without coercion.
Wimbi, I think you are right that there are people in many communities who are doing some really fantastic grassroots work and are getting local politicians and businesses to join them. I think we are seeing the beginnings of a shift in the tides, no pun intended, given the topic addressed in the following link >;-)
http://bfi.org/ideaindex/projects/2014/living-breakwaters
Living Breakwaters is a comprehensive design for coastal resiliency along the Northeastern Seaboard of the United States and beyond. This approach to climate change adaptation and flood mitigation includes the deployment of innovative, layered ecologically-engineered breakwaters, the strengthening of biodiversity and coastal habitats through “reef streets”, the nurturing and resuscitation of fisheries and historic livelihoods, and deep community engagement through diverse partnerships and innovative educational programs. The transformative educational dimension amplifies impact to the next generation of shoreline stewards while leveraging the expertise of the members of the SCAPE Architecture team, who are making groundbreaking inroads into state and federal agencies, setting new precedents for multi-layered and systemic approaches to infrastructure planning.
I don’t know. Sentences like that last one “The transformative educational dimension amplifies impact to the next generation … setting new precedents for multi-layered and systemic approaches to infrastructure planning.” make my eyes glaze over.
>
preserve the biosphere for the next generations
<
Wimbi, few appreciate that these next generations are being born now, not in some far off future time.
NAOM
True, but I was referring to the maybe one percent who right now do know that now is here.
I am suggesting that those people can come together and grow in numbers and influence, and right here, anyhow, that is what they are actually doing. A measurable fact, here, anyhow.
Here is a pretty ordinary place.
“peak oil” per capita (world) occured around 1980.
Below per capita consumption :
http://www.manicore.com/documentation/petrole/usage_petrole_graph9.jpg
My personal opinion is that most of the pundits who natter on in the cyber world know either nothing or next to nothing about oil and merely want to make themselves feel good by pointing out that peakers are supposedly dumb or deluded. They find this to be a very easy game to play since it takes them only a minute or two to find plenty of authorities who maintain that peak oil near term is myth.So they get to play righteous and smart and make condescending remarks about peak oil believers.
A very substantial number of so called journalists also fall into this trap.They are just playing it safe by going along with the conventional wisdom of the conventional crowd of people in charge of this old business as usual world.
Here and there you will find a reporter or journalist who will investigate the subject and report his or her findings but the MSM media seldom find space for such stories and articles anywhere near the front page and only occasionally do they find space in the back pages. My estimate of this state of affairs is that the owners don’t like to rock the boat anymore than necessary and tell the editors what’s what when it comes to not disturbing the stock market or the housing market etc.
Beyond that the editors of just about any publication I have ever seen have an obvious bias in one direction or another in terms of their politics- and this bias bleeds over to the tone and content of their publications.
Then in addition to all this there are without a doubt PLENTY of both pundits and business managers and economists and politicians and joe blows and susie six-packs on the street who firmly believe that even if peak oil is a real phenomenon it hardly matters because THE MARKET THE WONDERFUL WONDERFUL MARKET AND THE INVINCIBLE IN VISIBLE HAND were created by our LOVIN AND MERCIFUL SKY DADDY who WORKS HIS WORKS OF MERCY THRU THESE TOOLS.
Convincing such people to change abandon such deeply held beliefs is about as futile an undertaking as sweeping back the incoming tide with a broom.
When the day comes there is simply no longer enough oil to run the economy such people will ALWAYS rationalize their beliefs as sound by explaining the shortage as the result of evil greedy businessmen holding it back for higher prices or slimy environmentalist vegetarian lesbians wanting to force us all to go naked and eat sprouts and dimmercrat politicians wanting to put every body on welfare so as to control the country via welfare checks.
People believe what they want to believe and media mostly print or broadcast what ever promises to bring in the maximum number of readers sympathetic to the owners personal agendas- and the maximum number of advertising dollars of course.
This is not to say that if you take the time to really poke around a little you can’t mostly and easily discover the truth about most issues. It just takes a while- and most people are not interested enough to be bothered when it comes to peak oil , or global warming, or depleting fossil water , or crashing fish stocks, or superbugs, or even atom bombs.
I found during the dotcom heyday that business reporting was pretty bad. The average business reporter hadn’t been trained in business and generally reprinted whatever press releases he received. There was virtually no digging.
Now, with the online news cycle, I can’t say to what extent business reporters lack business training (they probably still do), but they are so eager to fill up online space that they write many, but poorly researched, stories. If the trend is to say “peak oil is over,” that’s what they all say. It’s a headline, whether or not it is true.
What continues to mystify me is how so many reporters can miss the reality that if cheaper, easier oil was available, no one would be bothering with fracking and tar sands. Getting oil from these sources is expensive and messy. No one would be bothering if the old oil sources were still adequate.
I think the sudden drop in prices is just a symptom of the fact that there is still a large gap between the cost of oil to producers and the price consumers are able to pay without really feeling much pain. There is so much play in the market that the prices is more or less random.
Hi Ilambiquated,
An alternative hypothesis is that the oil supply curve is steep in the range of 60 to 120 dollars per barrel (2014 US$) and that small changes(shifts) in the oil demand curve can cause large swings in the oil price.
I guess that would make sense if the peak oil story is true. If the industry can’t produce any more, then small changes in demand would have a big influence.
The peak oil story does not have to be true (though I believe that Ron’s guess about peak may be correct), you only need a steep oil supply curve.
Since 2005 the long term oil supply has been fairly steep, but over shorter periods such as 2007 to 2009 the short term supply curve has been steeper, with a price change of 75 to 100 $/b only changing supply by 850kb/d. The oil shock from the Arab spring caused a very steep short term supply curve from 2010 to 2011 with a price increase from 81 to 106 $/b only increasing World supply by about 100 kb/d (annual output change). The long lag between changes in oil demand and the change in oil output in response results in volatile prices.
The periods of oil price stability were in part a result of either the Texas Railroad commission (in the 50s and 60s) or OPEC (after 1983) adjusting World oil supply to match demand. In some cases OPEC was unable to keep prices stable in response to oil shocks, currently OPEC wants to regain market share by keeping prices under $70/b. If prices remain under $85/b, it is likely that 2014 will be the peak year for World oil output, and even if prices rise back to $100/b output may not rise much above 2014 levels, but a plateau might be maintained for a couple of years with the real oil price at $100/b, though the oil demand response is hard to predict.
Forgot to mention. The long tern oil supply curve (dotted trendline in chart above suggests a 75% rise in oil price results in roughly a 4.7% increase in oil output (where oil is crude plus condensate) since 2004. If this long term trend holds I would expect a real oil price of $130/b (2013$) might get us to 77 Mb/d, I think it unlikely that this long term supply curve will remain stable, so such predictions are not very useful. Oil prices at that level are likely to cause recession in short order and below ground factors may not allow such an increase in output of crude plus condensate.
On the other hand, fuel efficiency has barely moved at all in America, and the movement is mostly driven by government fiat. With a few exceptions, I don’t see Americans abandoning the suburbs or clamoring for more public transportation.
This suggests to me that people aren’t feeling much pain. Of course as I mention elsewhere, it is tough to change these big infrastructure trends. But even new car fuel efficiency improvements are meager.
I’m not questioning that oil prices are volatile, I’m wondering why. I think it is possible it is driven (within the corridor defined by the pain on the supply and demand sides) by speculation — that is, the aggregate opinion of the traders.
If short term oil supply and short term oil demand curves are steep,
(and over a 6 month period or less they are quite steep), then no speculation is needed to explain oil price volatility.
The drop in prices is a sign of too much supply. I’m amazed to see this is being ignored. As to why there is too much supply, it’s a combination of slower demand growth and supply increases in a very few countries.
http://www.telegraph.co.uk/finance/oilprices/11262690/Why-black-golds-low-prices-wont-last-long.html
This was posted yesterday but it is worth posting again since a lot of readers probably missed it.
So far as todays key point is concerned I would bet that Ron is right. Peak oil if we mean the real stuff- traditionally defined crude- is almost for sure here now or within the next few months.
The only point that I might differ on is how long it will be before oil prices go up again. I think it won’t be long at all- not more than six months at the most. This is assuming the economy doesn’t succumb to an acute attack of one of the it’s many other chronic illnesses between now and then of course.
But even if prices go up sharply and soon there probably will not be enough new production brought on line to offset the decline of legacy production.
OFM, thanks I did miss that in the last thread (some of them seem to stretch even longer than the old Drumbeat)I’ve read a lot of Liam Halligan from 2008 onwards and I would say he is one of the very few from a conservative business background who is fully peakoil aware.
I thought it was silly in that he attributes the dollar spike to Yellen announcing the end of QE in June, but the rate of QE taper was already thoroughly in place (since about January?), and had been for six months by June, so there was nothing special at all in any Yellen June statement.
It’s way too much coincidence that the huge dollar spike aligned on the calendar with oil (and copper and gold and silver)’s fall, and I believe some other commodities also lined up like that. Too much coincidence. The yardstick was doing it and it doesn’t have to be linear.
We have other events pending, in the context of what’s ahead. We have Greece’s upcoming elections. Those have lots of Euro smash potential (which drives the dollar up more). Japan’s election in a few weeks could be Yen huge, but I don’t know of anything talked of there that would stop Kuroda from his Oct 31 gigantic QE, even if Abe loses.
OTOH early next year we’ll get US Q4 GDP first look. A strongly negative number on that would depress the number, but that’s months away, and such moves tend not to be anywhere near what we’ve seen this year for FX.
depress oil’s price — which is a number I guess
I would expect a rebound in one-two years’ time. However, as prices increase we will see more activity, and reduced demand. Peak oil depends on how you define oil. We are likely at peak conventional oil. Condensate and NGL should continue to increase. Biofuels, syncrudes from gas to oil, refinery gains also have to be taken into account. It’s a very complicated dance.
It was interesting to note that at the beginning of the year the majors were already cutting investment in unconventional oil including deep-water. If they were struggling to make money at $100 + oil what will their investment plans look like now? The thing is as far as domestic shale goes those who keeping on the treadmill on the back of investor money will keep going as long as that money keeps coming in, if we look at what happened with shale gas even rock bottom prices have not stopped production. If geology dovetails with economics then there will be a blood bath in the high yield bond market and I’m not sure that unconventional production will ever significantly recover in the US.
Noted that a few Ronposts ago. What a coincidence the majors reined in big projects early 2014, and reined them in sharply, and not just one major, they all did.
Late last night I looked up EOG’s levered free cash flow and found a startling -$500 million number. The severity of the event is about 100X larger than MSM knows and several times larger than the Gentle Decliners see. The whole concept of the big boys buying up the bankrupt small guys so that the event is softened and made gentle gets gutted when you see that the big boys Have No Money. But then I noted Bank of America was FORCED to buy Countrywide during 2008’s Apocalypse. They refused at first, but Bernanke and Paulsen FORCED them to acquire even though they could not afford it.
The point being there . . . cataclysm in these things can always be addressed by the Fed’s printing press.
We need more information about what happens to flowing wells if they are shut down for a year or two? What happens to the geology? I speculated that no one has done any long term studies of what happens to thin oil if you expose it to fracking fluids for a year or so at high pressure and temperature. Maybe it breaks down into something non oil. That would be eyebrow raising.
Watcher,
“What a coincidence the majors reined in big projects early 2014, and reined them in sharply, and not just one major, they all did” Would you care to expand on this? Come now elucidate your thoughts.
No. But it is a juicy coincidence, yes?
Watcher,
Mike has pointed out that the wells that are producing will not get shut in. The cost of continuing to produce oil from these wells is probably about $12/b, transport is $12/b, and royalties and taxes are about 30% of well head prices. If wellhead prices were $28/b ($40 at refinery gate), royalties and taxes would be $8.40/b plus OPEX of $12/b for a net revenue of $7.60/b. Companies that go bankrupt will sell these wells to small companies that have not taken on a lot of debt and can continue to operate. Mike has said he will not touch these shale wells with a 10 foot pole, but at the right price he might buy some wells and take a chance on some one year old wells that would net $1.6 million at $28/b at the wellhead, if he could buy them for $500k (and the assumptions for cost etc that I have made were verified by an expert.)
Can you pick well by well when you are buying? My understanding is that when you are buying you are buying by the certain area and you have to buy the ones that have reclamation and remediation liability attached to them. Where these costs end up?
Ves,
If you are correct about the way it works, then someone would analyze the group of wells under consideration. I imagine you might have to buy all the wells on an individual lease, but if a company is bankrupt the assets will be sold to the highest bidder and I do not think the purchaser is required to purchase all assets. Even if they were so required, I imagine there are M+A specialists that would buy the whole company at a discount and then sell it off in pieces.
Okay. If one were concerned about all this, one would form a LOT of LLCs and have each one own just 1 oil well. A bit like in rental property. Don’t put multiple items in one LLC or they are all vulnerable to legal grab should an occasion arise.
And thus the loan that funded the drilling of a well that is now 2 yrs old and flowing too little to service the loan . . . what happens there? The well can fund oil hauling trucks and flush water but it can’t service the loan. This is a single well, isolated within the LLC. What do you do if you’re the LLC principal? You can’t “just operate the well and not pay the loan”. That doesn’t fly. The creditor will seize assets and this also abrogates all the trucking contracts. It doesn’t just smoothly keep flowing. It has to litigate. Which means get in the docket queue.
A bigger company with loans for all of its wells of varying age, they (EOG I just checked) has sharply negative levered free cash flow. Look it up on finance.yahoo.com. -700 million. That’s operating revenue minus all costs including debt service. It’s negative. The value of their leases has appreciated and they can probably borrow on those to keep the wheels turning (and probably have) but -700 million was at $100/barrel. Who is going to lend now? How do they keep the oil flowing from already existing wells if they default? Default, btw, is called bankruptcy because bond law is (or was pre GM) absolute. If you default on one bond, you default on all of them.
But this, as have all things post 2008, walks the broad line on the ground of pretending capitalism is dictating things and knowing that if you can make a case for national (or global) systemic risk, the Fed will print money and save you.
Now the Fed would like to cultivate the delusion too, so maybe they’ll find a way to trash the dollar down and elevate oil. That would be more concealed a maneuver than printing money and handing it to EOG and CLR.
here is some info that I got how is done. if somebody is buying wells it’s all process of negotiation. Seller will say I am selling these 100 good wells but you have to buy these 10 crap ones with environmental liabilities on them. And they negotiate.
In bankruptcy I am not sure what the process is and who has seniority getting the assets. But I found out that there is another type of wells called “orphan wells”. These are the wells that nobody wants them. And they end up in government hands and it is their liability for decommissioning them. This info for Canada and I really don’t know if it is any different in US.
Did a lot of reading about that some weeks ago. It’s the same. If a huge swath of bankruptcies are declared, there is no one to plug and abandon and the surety bond won’t cover it.
So the state has to do it, and they do it slowly in keeping with available budget. They won’t be pleased about this and you can bet legislation will be enacted to prevent it happening again — all of which makes it hard to restart shale, where “hard” is defined as another $40/barrel reqd price above what is present breakeven — and that obstacle is just from the new regs. Not lender reluctance.
In fact, it just occurs to me, when anyone leaves a failed business, he’s not happy about it.
Toss in some alcohol and you might have rather a lot of orphaned wells with the spigots open flowing out onto the land.
Nothing happens to the “geology.” Geology is the science of things that happened to the earth tens of millions of years ago. We do not alter what occurred in a certain geological time period by sticking a straw into it. Mechanically, wellbores that are frac’ed and full of proppant can suffer fracture closure if shut in for long periods of time. Over burden can cause induced fractures to close.
Texas is a funny place! It’s economy is incredibly dependent on the knowledge that Geology provides, yet the scientific basis of that knowledge runs counter to the belief structures of so many of it’s citizens… and political leadership.
Some months ago I was musing about genetically modifying the oil eating bacteria used in Gulf spill cleanups so that the critters can live at high temp and pressure underground.
Then terrorists can inject them in all major fields and watch Cataclysm.
So in general I am wondering if there are other mechanisms for permanently, irreparably damaging oil fields — like long term (year or two) exposure of the oil to the frack fluid. Pure speculation.
There’s always money to buy broke oil companies. When the price goes down enough, the vultures move in. That’s not something I would worry about.
Even if oil production has already peaked, it does not mean that prices will be high. In my view there have been significant changes in demand over the last five years as oil at > 70 USD per boe has been priced out of the heating (residual) oil market. Natural gas, LPG, coal, biomass,propane…… ( at 20 USD per boe) and even electricity from natural gas (40 USD per boe) are much cheaper. The market size of heating oil stands up to 15 mill bbl per day and this excess supply is searching for a new home. In my view it will take at least one year until prices can recover again. When the market has worked off this excess supply, the oil markt will be much smaller and concentrating on transportation fuels, which has a higher barrier of entry, and organic chemicals.
What reference are you using for a home heating oil market that large?
In the US, it looks to about 230,000 barrels/day.
http://nationalaglawcenter.org/wp-content/uploads/assets/crs/R43511.pdf
One reference is the BP statistical review. It is not only home heating oil, but mostly residual fuel oil used by utilities. The residual fuel market in the US shrank from 1.0 mill bbl per day 10 years ago to around 0,2 mill bbl per day (EIA reference: ia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WREUPUS2&f=W). The same trend occurs in Japan, Europe and recently also in China at massive decline rates. Mideast residual fuel oil is still growing slightly, yet will be declining as well in my view in the future.
The overall liquids market will continue to grow in this low price environment. When supply and demand are closer to balance and we see stocks drawn down the oil price will rise.
The IEA now suggests worldwide consumption will increase by 1.13 million barrels per day in 2015, this after several recent adjustments downward. I agree with Mr. Patterson that neither OPEC, nor non OPEC production can cover that. The $64 dollar question is can the US shale industry continue its relentless manufacture of well after well after well? I think not, even if, rather when prices begin to rise again in late 2015.
For all the banter and swagger in the shale oil industry’s propaganda about 50,000 wells and energy independence it somehow forgot about oil prices and oil price volatility. It assumed prices would hang around a hundred dollars and life would forever be peachy. That was stupid. Something tells me that the boys that are funding this shale thing have had enough, or will shortly have enough and want to see some money, some serious debt reduction.
Thanks for the comments Mike. But I would like to think we are all on a first name basis here on POB, so just call me Ron.
Hi Mike,
As you have 50 years in the business and know how these things go in the real world, do you think it is likely that the LTO drilling will shut down completely at $68/b for WTI? I would think things will slow down considerably (from 5000 wells per year to 2000 wells per year for Bakken and Eagle Ford combined, possibly less). If this guess is correct, output will decline and eventually prices will increase.
The big question is: “Will the drilling rates increase as prices rise or will LTO players become much more conservative and resist the urge to expand too quickly?” By your comment above I think you would expect that a few lessons would have been learned and the LTO investment will become much more conservative. I also assume that this reduced rate of drilling would not allow the the LTO plays to recover to present output levels.
If oil prices remain at $70/b, I agree with Ron that the peak may be here, if oil prices rise back to $100/b and remain there, the decline might be delayed by 1 or 2 years (plateau from 2014 to 2018.)
I have no idea what will happen to oil prices except that they will rise, fall, or remain where they are probably in the range of $60/b to $100/b (in 2014$) over the next 5 years or so.
G’day, Dennis:
Producing shale wells will not get shut in, whatever the price, IMO. Sunk costs, debt requirements, leasehold issues, etc. requires that wells keep pumping; some cash flow is better than no cash flow. I have seen your incremental lift costs per barrel of oil estimates evolve over the past 6 months, goodonya. I might now say that 12 dollars a barrel might be too much and maybe 8-9 dollars is more like it. I am no expert on that and for the record, I would not take a shale well if you gave it to me, lol. I have no faith in those long EUR tails and plugging and decommissioning costs are sky high on those puppies. It there is a fire sale on shale wells it won’t be big integrated companies doing the buying, it will be independents and they are going to have to borrow money, more money, to buy those wells.
I believe there will be shale wells drilled at less than 65 dollar oil, yes. A very smart friend of mine said recently that regardless of net cash flow, shale oil companies MUST keep booking reserves to keep the money guys off their backs. But, as you correctly state, the rate of well manufacturing is going to slow way down. I think rig counts are going to plummet soon. I have been astounded, and pleased (for myself), that oil prices have been so high, and so stable the past 3 years. I have not seen much of that in my day, save the 60’s and early 70’s. The shale oil industry has rolled for two reasons…high, stable prices. Them days may be over now.
If we have reached the maximum production rates of oil and condensate in the world, we have also then seen the best the shale oil industry had to offer. Oil prices got ’em; I knew it would. Shale oil was not a “revolution,” as it touted, it was just an uprising.
Forget growth, can the LTO industry in American hold its ground at 70 dollar oil, Dennis?
Mike
Hello Mike and Dennis,
Is it possible that the U.S. government could step in as a buyer for the SPR to help these shale producers? QE 3?
Best,
Tom
The government, if they did decide to buy oil, would buy it at the market price. I don’t see how that would help shale producers.
Ya I agree with Ron. An SPR buy would not drive up demand enough to stop the price decline.
Hi Tom,
What Ron and Watcher seem to be missing is that by purchasing oil for the SPR, there would be an increase in demand, so there might be a small increase in price which would help the oil companies. If Euan Mearns analysis that a decrease in demand of only 1 mb/d caused prices to fall, then an increase in demand by the same amount might cause oil prices to rise.
Any effect would end when the SPR is full, and there is probably not a lot of excess space to store the oil, in fact the SPR may be full already, in which case it would not be an option.
Based on Wikipedia information there is space for about 36 million barrels before the SPR reaches capacity (based on Oct 2014 data).
So if the US government bought 500 kb/d to put in the SPR, it would reach capacity limits in 3 months.
Given the low prices, this does not seem to be a bad idea, except that anything the government does that raises oil prices would not be looked on favorably by the public, so the government would buy oil slowly in an attempt not to affect oil prices. (Maybe at 250 kb/d.)
If the purchase rate is very slow, and prices don’t change then it does not help the oil companies very much.
Correction, capacity limits would be reached in about 2 months if purchases were at 500 kb/d and 4 months at 250 kb/d.
Correction 2.
Watcher gets the demand thing, but thinks it will not be significant, this is likely to be correct because the government does not want to be seen as interfering with the oil market.
Hi Dennis and Ron,
I appreciate the feedback.
I will push back just a bit on the U.S. not wanting to be seen as interfering with the market. As you note Dennis, filling the SPR while prices are low would be a logical thing to do, and thus, it seems to me, would be easy to spin to avoid any perception of market manipulation. Now, if there is not enough space in the SPR to have a meaningful affect on demand, then it is a moot point.
Best,
Tom
Hi Tom,
I would agree the government might fill the SPR if it acted logically, generally speaking politics and logic seem to be mutually exclusive 🙂
Illogical indeed, thanks again Dennis.
Hi Mike,
Thank you. I always appreciate your perspective and am confident that your guesses about LTO (even though you don’t run any LTO wells) are far better than my estimates.
At $71/barrel (in 2014$), there will be no growth in LTO output. Even if oil prices return to $100/b in 2014$ by 2030 (2.4% annual increase in realoil prices), output will decline, but not as quickly as with oil prices fixed at $71/b.
I compare how things might look at fixed oil prices ($71/b) and with oil prices slowly rising. Reality may be somewhere between these scenarios. Or if oil prices rise more rapidly than my “high price” scenario, output might be higher.
Note that this “high price” scenario is between the AEO low price scenario(oil prices at $75/b in 2030) and the reference scenario (where prices are $123/b in 2030 in 2014$.) Chart with two scenarios below.
Hi all,
A chart with 3 different price scenarios, low, medium and high. The low and medium are the same price scenarios as my previous chart and the high price scenario has real oil prices rising at 4.9% per year from $70/b in Jan 2015 to about $140/b in Jan 2030 about twice as fast a rate of increase as the medium price scenario. Reality will be somewhere between the low and high scenarios, but my guess is that between the medium and high scenarios is more likely than below the medium scenario.
Another 99.993 scenario’s to go before Watcher will admit that you were right somewhere. 🙂
Thanks for these elaborate projections, Dennis. They are allways very insightfull because you allways mention your assumptions.
Hi Verwimp,
I am actually not hoping to be right, just taking the improved data from Enno Peters, FreddyW, some of the ideas that you present, the cogent criticism from Doug Leighton, Ron. Mike, and others to update what might happen in the Bakken.
The assumptions in the above scenario is that the underlying TRR approximately matches the USGS mean North Dakota Bakken/Three Forks estimate (April 2013). Then I input economic assumptions into the model which are:
All figures in real 2014 US$:
Well cost $9 million
real annual discount rate 7% (equivalent to a 10% nominal rate)
royalty and tax rate 26.5% of wellhead revenue
OPEX $4/b
Other costs $4/b
Transport cost $12/b
The future new wells added are assumed to fall quickly to 150 new wells per month from 200 new wells/month in Sept 2014 to 150 new wells/month in Nov 2014 and then remain at that level.
It is also assumed that new well EUR started to decrease in July 2014 and reaches a maximum rate of decrease of 8% by Dec 2014. When the net present value(NPV) of future output from a well is equal to the well cost the well is no longer profitable and as the NPV falls towards 9 million the number of new wells added is assumed to decrease. Under the assumption that 150 new wells per month causes the EUR to decrease at an 8% annual rate, if the new wells added is cut in half to 75 new wells per month the EUR rate of decrease falls to a 4% annual rate.
Balancing all of these factors so that the new wells remain profitable under the economic assumptions I am using, results in the scenarios presented.
I realized after I did the scenario above that I had assumed 40,000 wells for the high price case as a maximum. I adjusted this downward to 35,000 wells maximum (between David Hughes optimistic and realistic cases in Drilling Deeper) and adjusted the “high price” scenario to a 4.3% annual rate of increase from 2015 to 2040, the real oil price is $131/b in 2030 in this scenario. All other economic assumptions are unchanged from the previous scenarios(in fact the low and medium price scenarios are unchanged only the high price scenario is different). The high price URR falls to 8 Gb from 9 Gb in the previous scenario, note that this is similar to David Hughes “optimistic” estimate of 8 Gb by 2040 ( his realistic estimate is 7 Gb, which is similar in magnitude to my medium price estimate). Chart for modified scenario below, again I think somewhere between the medium price and high price scenarios is realistic.
I doubt there will be any real decrease in wells completions until the middle of 2015, if then. In September there were 610 wells waiting to be finished. After wells have been drilled, the majority of the money has already been spent so there is no need to slow down the fracking crews.
Also there has been no appreciable decline in drilling rigs working in North Dakota.
I do expect that there will be a decline of drilling in the fringe areas. But even wells already started in these areas will still be completed.
Hi Ron,
The next Director’s cut will be interesting. The wells waiting on fracking will certainly be completed over 3 or four months, but the number of rigs operating can change in a hurry, a lot of the rigs we see operating may shut down when they have finished drilling whatever well they are currently working on. If oil prices remain at 65 to 70 dollars per barrel, the rate of drilling will slow down quickly. You don’t think that low price scenario is too pessimistic do you?
Dennis, I really don’t know what to make of your chart. The production part seems way too pessimistic.
Yes if prices stay this low drilling will slow down early next year. But wells completed will not start to drop off until the middle of the year. Yes the 610 wells could be brought on line in three months but the new wells they are drilling right now and will continue to drill will just pile up behind them.
Hi Ron,
You may be correct that it is too pessimistic, but I must admit that I am surprised that you think so. Note that the cumulative output for that scenario is about 3 Gb to 2040, which is between Jean Laherrere’s Bakken estimate of 2.5 and 4 Gb, in some cases you believe Jean Laherrere’s estimates are too optimistic, perhaps in this case you believe his higher estimate of 4 Gb is more realistic?
At the link below is an analysis of the Bakken by Jean Laherrere:
http://aspofrance.viabloga.com/files/JL_2014BakkenPeak.pdf
The low price scenario assumes that drilling rates will slow down. Often analysts suggest that hedging will allow the oil companies to do fine, but it is the expectation of future prices that is key. When deciding how quickly to drill and frack new wells these companies consider how much future income they can expect, low oil prices will decrease the incentive to drill new wells.
I believe that you think the oil companies in the Bakken will keep the pedal to the metal and continue drilling at 200 wells per month through the end of November at least (and the rig count would seem to confirm this). This would amount to 1200 wells (600 waiting for completion in early October plus 400 more wells drilled from Octt to Nov), and if we also assume these wells are fracked at 200 per month, then we could have 200 wells per month from Oct to Feb. My low price scenario assumes that starting in October the new wells added go as follows (monthly new wells added): 212, 182, 152, 150, 130, 110, 90, 70, 50, 30, 10, 0.
This is to attempt to keep new wells added profitable. I would be curious as to what number of new wells added seems realistic to you if oil prices remain $71/barrel or less for all of 2015?
I can easily create any scenario I just need a list of new wells added and I can ignore profitability.
My low price scenario assumes that starting in October the new wells added go as follows (monthly new wells added): 212, 182, 152, 150, 130, 110, 90, 70, 50, 30, 10, 0.
That is totally unrealistic! Dennis, much of the capex has already been spent. Well completions will stay high well into next year and drilling has shown no sign of slowing down. There are 190 rigs working in North Dakota as of this morning.
If prices stay low things in the Bakken will definitely slow down. But that will take time. New capex will slow but projects that depend on capex already spent will continue. And new wells will not go to zero for many years yet.
Dennis, I thought I was the pessimistic one here. But your sudden pessimism shocks me. You were once a Pollyanna concerning the Bakken, what happened?
Hi Ron,
New scenario at link below.
http://peakoilbarrel.com/peak-oil-2014/comment-page-1/#comment-462981
Mike, demand will increase. And it will be met, if demands starts to exceed supply a bit much then the Saudis will pump a little bit more. And if prices skyrocket the USA can always get a bit real, and modify sanctions on Iran (they have spare capacity).
There is a black market for oil in the Middle East. Oil is stolen and sells at twenty dollars per barrel.
Might not be much, but there will be buyers.
ISIS has been doing this for months.
I tend to take anything I hear from any government with a grain of salt but nevertheless even the worst sort of crooks tell the truth a good bit of the time. I had one a- a relative in fact- once explain to me that he could easily prove that he did not commit a certain burglary- but that doing so would basically be admitting he was someplace else involved in a drug deal.As it happened he was not indicted for the burglary and to the best of my knowledge the law never found out about that PARTICULAR drug deal.
(Nevertheless they found out about OTHER deals and he is now pulling a long mandatory sentence.)
So- Everybody is free to make up their own minds about this statement by a Russian government official.
http://en.itar-tass.com/economy/764304
I tend to believe he is telling it more or less like it is..Especially the part about expecting oil prices go back up again before very long.
And you don’t have to be a diplomat to get the reference about uneconomic projects being abandoned. That one is aimed directly at yankee tight oil..
Checkout The Breakeven Oil Prices For Every Drilling Project In The World
Oil is getting slammed.
On Thursday, OPEC announced that it would not curb production to combat the decline in oil prices, which have been blamed in part on a global supply glut.
And now that oil prices have fallen more than 30% in just the last six or so months, everyone wants to know how low prices can go before oil projects start shutting down, particularly US shale projects.
In a note last week, Citi’s Ed Morse highlighted this chart, showing that for most US shale plays, costs are below $80 a barrel.
Yeah, but for most Bakken shale drillers the railhead price is now below $60 a barrel. I have no idea what it is for Eagle Ford drillers.
This notion of “break-even” prices is confusing unless it is concurrently stated whether or not the price includes up-front capital costs or is just the operating cost. I suspect some drillers, working on several bores per pad don’t actually know the current costs. And for the existing wells the only cost that matters is the operating cost. Almost certainly cash flow on existing wells will stay positive well below current prices.
If you don’t count loan service reqmt, that’s likely true. Hell, most businesses in the world can operate at a profit if you don’t count some costs, like maybe salaries.
Right, meaning the drillers will stop drilling but not necessarily go broke.
If the Fed gives them money to service their loans then they don’t default (that’s what broke means).
Or the US Govt could order the bond holders not to declare default even if the frackers don’t service the loan. That’s what happened with Greece.
Step by step, in the relentless pursuit of client money, every need-to-look-busy oil analyst at every advisory firm in the country is releasing studies of lower and lower breakeven for shale.
At least until they find buyers for their (and their clients’) shale company holdings.
As noted, the already drilled and flowing wells producing only maybe 150 bpd still has to pay 2.5 million dollars per year on a 5 yr $10 million loan at 5%. It’s the non new wells that are now deep red. That sharp decline is killing them. 150 bpd at $49/b just can’t cover expenses. But if you shut them down, the loan service requirement doesn’t stop. It doesn’t help to shut them down.
They must have a bailout or fold altogether. “Slowing production” . . . slowing drilling . . . doesn’t address the problem. The 1, 2 and 3 yr old wells still have their loan to pay.
Hmmm. There is always the “workout session”. That’s where a big lender walks into the bank and starts talking about “restructuring”. The bank can declare default and shut them down, but that means they won’t get their money back.
Except . . . collateral. Usually restructure means you lose all your business jets and salaries for top executives are slashed, so it’s not without cost. And if you try to play hardball, they do (one imagines) have collateral to seize (I guess the leases).
OTOH, these are HY loans, so there is no bank with whom to negotiate workout. The public holds the HY paper.
This is going to get ugly without a bailout.
big borrower
I think those are the marginal price of a barrel. That does not include overheads.
For the last quarter EOG made a profit of $1.7B on $5.1B in revenue. That a profit of 33% of revenue. Their average selling price for a US barrel was $97. Their full, all-in, cost therefore was $65. But some portion of those costs are relatively fixed, they don’t change based on the price of oil or the amount of revenues.
If EOG sell all their US oil at $65 they could break even. They have $1B of depreciation on the P&L, that is a non-cash expense so they could reinvest that into new exploration. They invested over $2B last quarter but if they want to keep spending at that level where do they get the extra $1B to do that? Can they borrow it?
By my simple calculations, at $65 bakken oil, EOG will have to cut their exploration expense by more than 50%.
Not bad.
I haven’t gone thru all their filings. When you have negative free cash flow but are logging in with 20% declared profit margins, something non cash is getting claimed — and usually it’s non cash appreciation of property.
That appreciation falls apart with the oil price dive (assuming it was lease valuation). The free cash flow negative does NOT fall apart. It gets worse.
Look, the industry outright dies unless there is a significantly fast oil price reversal or government/Fed money. That’s just math. That’s not dreaming.
Sorry if this has already been linked, but if I understand what he and you are saying (highly doubtful) this guy seems to agree:
http://www.resilience.org/stories/2014-11-30/turnabout-opec-shows-u-s-oil-producers-who-s-boss1
Furthermore:
“…At these new low oil prices, it’s unlikely that many investors will be willing to put more money to work in the tight oil deposits of America. That will make it hard for drillers to fund new drilling since they have insufficient cash being generated by current operations. In addition, with oil prices significantly down, many independent drillers may have a hard time paying off their debts, let alone paying the costs of drilling a large number of new wells. And with yearly field production decline rates in tight oil areas of about 40 percent–which simply means that no drilling for a year would result in a 40 percent decline in production–drillers have to drill a large number of new wells just to make up for production declines in existing wells BEFORE they get to new wells that actually add to the overall rate of production…
…the current rout in the oil markets could lead to cascading defaults that start with the junk bond debt of oil drillers and move through banks heavily invested in oil company debt. That, in turn, could cause a general stock market collapse. Thus, instead of promoting economic growth, low oil prices would be the cause of the next stock market crash and the next worldwide recession.”
See, this is all logical thought. But logical markets left the building in 2008.
The global system is too delicate to leave its fate to free markets. That is the reality of oh, about 2010 til now. Starting in 2010 we started to see that there was no fix. The breakage of 2008 isn’t getting fixed.
And thus, huge negative results cannot be allowed. “Socialize losses, privatize profits” is the new definition of capitalism. All the things you just said, or quoted that guy saying . . . absolutely, that’s how it all should unfold into a huge disaster, and it therefore won’t be allowed.
Watcher,
I agree entirely with your sentiment post 2008, however unlike you I don’t think the central banks are omniscient. Of course they will TRY to intervene in the markets and curtail all systemic risks from cascading however at some point all their bolts will be shot & they will inevitably fail.
Let’s have a look at the central banks that had full reign to monetize their debts & print their own currency who have failed post 2008. Off the top of my head:
Zimbabwe hyperinflation hits its peak between 2008 to 2009
Belarus hyperinflation between 2011-2013
Venezuela bond default now looking likely by the end of 2014
http://www.bloomberg.com/news/2014-10-13/venezuela-default-almost-certain-harvard-economists-say.html
Of course some central banks are more equal than others, but great powers wax & wane.
If I were a betting man I would say that Japan will be the next big industrial power to fail with their unconventional monetary experiment.
Correct. Their only real option is to stop drilling and try to live off the proceeds of the existing wells until the price goes back up. Because of the Red Queen thing this means production will fall.
“Because of the Red Queen thing this means production will fall.”
That’s exactly what some people seem to be missing. It is kind of hard to wrap ones mind around how dependent the whole thing is on constant new drilling at mind-boggling rates. That goes away for a couple years, and what’s left?
If anybody at all can be trusted what is left at the end of year with no new production brought on stream is not more than about ninety six percent of the previous years production. Some authorities put the figure depletion rate higher. I am not aware of any body with either qualifications or reputation who puts it lower.
Hi OFM,
Did you mean depletion rate or decline rate?
I know that you are aware of the difference, but some people use these terms interchangeably and they are different things.
The average oil field decline rate is greater than 4% worldwide (for fields that are in decline). These decline rates includes fields where there is continued drilling.
In the LTO plays decline rates with no further completions would be about 29% for the first two years.
The rate of decline moderates to 17% for years 3 and 4 and eventually stabilizes at about a 6% decline rate after 15 years. At this point output has fallen by 88% from peak output levels. This is for the North Dakota Bakken at a fixed price level of $71/b where new wells added are assumed to fall to zero from Oct 2014 to June 2015 and no wells are added after that point, total wells completed are under 10,000 and URR is between 3 and 4 Gb.
World wide, if Jean Laherrere’s estimates are correct for C+C less extra heavy (oil sands in Canada and Venezuela), there are roughly 1000 Gb of reserves and about 27 Gb are being produced so depletion rates would be about 2.7%. Note that if we consider only reserves that are producing oil (there are a lot of undeveloped reserves), the denominator is only about 500 Gb, rather than 1000 Gb and I use the term extraction rate to indicate how fast these “producing reserves” are being extracted, the extraction rate is about 5.4% and has been increasing since 2002, new “producing reserves” are being developed more slowly than the rate they are being extracted so to maintain output the extraction rate has increased, eventually this will reach a limit, probably at around 6% or less. Chart below shows an Oil Shock model with extraction rates reaching 6% in 2020 then falling to 5.9% by 2030 and remaining constant until 2040. Peak is 2014 to 2015 with annual C+C decline rates less than 2% through 2040.
The decline rate can be manipulated with infill drilling. The depletion rate cannot. I think it is clear that Mac was talking about depletion rate.
Of course LTO is a different animal. Depletion seems to be in acres rather than in barrels. That is the field plays out by area instead of volume.
Hi Ron,
The depletion rate is also affected by the rate that oil is produced. If one believes Jean Laherrere’s latest estimates of proved plus probable reserves (and I think reserves are at least as large as this) for C+C less extra heavy(XH) = 1000 Gb (year end 2013) and look at C+C-XH output (27 Gb for 2013), the depletion rate is 2.7%.
If 2014 output is unchanged and there are no new discoveries or reserve growth then in 2014 the depletion rate will be 2.8%.
Obviously Jean’s estimate of 1000 GB is just a guess. My guess would be between 650 and 700 Gb which would put the depletion rate at about 4%.
I think Mac’s estimate was spot on.
Hi Ron,
Well Mac said nobody with any reputation suggests it is less than 4%. In my humble opinion Jean Laherrere’s reputation is excellent, and I think you do great stuff on this site Ron, but 650 Gb, would put World URR at about 1850 Gb when extra heavy oil is excluded, that is not a good estimate, even Jean Laherrere’s 2200 Gb estimate for World C+C-XH (extra heavy oil) may be a little on the low side. Jean Laherrere has access to proprietary scout databases that I do not have (and as far as I know you may not have either) which makes his estimates much better than mine.
I did make an error however.
Jean Laherrere puts 2P reserves at 800 Gb, not 1000 Gb, he expects that 200 Gb will be discovered in the future based on the World creaming curve. So my 2.7% depletion rate is incorrect it should be 27/800=3.4% in 2013.
It also occurs to me that OldFarmer Mac said something about no new production coming online, if we are talking about proved plus probable reserves, that is not relevant, which is what made me think he was talking about decline rates. Perhaps he was referring to depletion of producing reserves (reserves which have been developed and have started production).
In that case I would agree with his estimate. My estimate for the depletion rate (or extraction rate) from producing reserves is about 5 to 6%, though the estimate of producing reserves is based on a model which may or may not reflect the actual level of producing reserves.
In the US producing reserves are about 71% of 2P reserves, if we assume this is true for the world the World would have 560 Gb of producing reserves and the depletion rate of producing reserves would be 4.8%. My shock model assumes the World has a somewhat lower ratio of producing to 2P reserves than the US (which is the most mature region) at about 57% (459 Gb) so the depletion rate is higher (5.9%). So I would agree the the depletion rate of producing reserves is likely to be 4% or more, but it is not clear if this is what Mac meant.
Depletion rate from 2P reserves is 3.4%.
Depletion rate from proved reserves is about 4.5%(600 Gb proved reserves).
Depletion rate from producing reserves is roughly 5.9% (460 Gb producing reserves).
Dennis, of course 800 billion barrels is a lot more reasonable than 1000 billion barrels. And I would not argue with Jean about that number. But I think my figure is more accurate. And I did not just pull that figure out of my ass.
OPEC puts non-OPEC reserves at 284 billion barrels. (That does not include Canadian Tar Sands.) And just about everyone else puts non-OPEC reserves in that neighborhood.
Since currently non -OPEC produces 58% of world C+C, and I have always maintained that how much oil a country produces depends entirely on how much oil they have to produce, I believe non-OPEC reserves to be greater than OPEC reserves.
But I doubled non-OPEC reserves then added another 100 billion barrels just to make sure I am on the high side, soooo…
Bottom line, I think 650 to 700 billion barrels of proven reserves is a very conservative figure. If I had to put money on it I would bet there is not that much left.
Hi Ron,
Your estimate of 700 Gb may be correct for proved plus probable reserves for the end of 2013. That would put the non-OPEC depletion rate at 16/284=5.6%, you assume that the depletion rate should be similar for OPEC. For OPEC we would 211Gb of reserves if the depletion rate was the same as non-OPEC for a total of 495 Gb of World Reserves (2P). Clearly you do not trust such an estimate. Your 700 Gb estimate suggests an OPEC depletion rate of 2.6%.
I am not surprised that you expect there is less oil rather than more, I think Jean Laherrere’s estimates are conservative, they are the best analysis I have seen, but I think his Hubbert linearization suggesting a World URR for C+C less extra heavy(XH) oil at 2200 Gb is too low. In fact fitting a creaming curve on 1900 to 1980 discovery data leads to a URR of 2500 Gb for C+C less XH, hubbert linearization gives the same result. Discoveries between 1980 to 2009 will likely experience reserve growth as reserves are developed. Jean Laherrere expects about 200 to 250 Gb of new discoveries, I expect about 500 Gb of new discoveries plus reserve growth.
Jean Laherrere estimates about 1950 Gb of C+C-XH barrels had been discovered by 2010, about 1200 Gb of C+C-XH oil was produced through year end 2013. If that 1950 Gb estimate is correct, it would suggest remaining reserves are 750 Gb, I think an estimate of 250 Gb of future discoveries and reserve growth is quite conservative. My estimate (2500 Gb) is roughly midway between the USGS estimate of 3000 Gb and Jean Laherrere’s 2200 Gb estimate for the World C+C-XH. URR.
Your 700 Gb estimate suggests an OPEC depletion rate of 2.6%.
Woah! Nowhere did I suggest that OPEC has 700 GB of reserves. 700 GB is my estimate of total reserves, not OPEC reserves.
However I do think that OPEC (Middle East) reserves are depleting slower than non-OPEC reserves. That is because the average field is much larger than the average non-OPEC field. Large fields deplete slower but infill drilling has sped up the depletion rate quite a bit.
Hi Ron,
You suggested World reserves were 650 or 700 Gb, I took 700 Gb and subtracted non-OPEC reserves to get 416 Gb for OPEC Proved plus probable reserves, in 2013 OPEC produced about 11.7 Gb of C+C so the depletion rate is 11.7/416=2.8%. If we use Laherrere’s 800 Gb and use your 284 Gb for non- OPEC reserves we get 516 Gb of OPEC reserves and the OPEC depletion rate would be 11.7/516=2.3% vs 15.3/284=5.4% non-OPEC depletion rate.
For the world, your estimate would be a 3.9% depletion rate(27/700) and Laherrere’s would be 3.4%(27/800).
Many years many ago I helped discover an oil deposit and was miffed when the company (a major) refused to put it into production. Complaining to my boss he explained: “A positive production decision has basic requirements Doug and operational feasibility isn’t just a list of ‘nice-to-have’ features. The reserve MUST have longevity so time can iron out price variability and production costs MUST be in the lower percentile so long term costs will be lower than most of our competitors. Then, when prices drop, as they inevitably will, we’ll still be making a profit, a good profit. If you’d brought this reservoir to a junior I’m sure they wouldn’t hesitate to develop it, and it might make a great stock play. But that’s what it would be, a stock play, not a proper business decision.”
That’s the reason I doubt oil major will be jumping in to collect struggling LTO player “assets”: no longevity, high production costs.
Since that time the rules changed, of course, because most significant oil deposits were nationalized and majors mainly realized profits from marketing products (gas, oil, grease, etc.) and from refining as opposed to selling oil. But that’s another story.
“The reserve MUST have longevity so time can iron out price variability and production costs MUST be in the lower percentile so long term costs will be lower than most of our competitors.”
Not bad, Doug. Mike said up thread that the shale miracle seemed to have forgotten price can fall (just like the real estate industry did, everywhere on Earth but London).
“That’s the reason I doubt oil major will be jumping in to collect struggling LTO player “assets”: no longevity, high production costs.”
If Apocalypse looms, things are done. Bank of America didn’t want to buy Countrywide Mortgage, but Bernanke and Paulsen forced them to. I believe he died of a heart attack before all things in that matter were resolved. Convenient.
If starvation looms, money will be printed and handed to frackers.
“Since that time the rules changed, of course, because most significant oil deposits were nationalized”
That’s coming. Fast. This is the value of Ron’s data hounding. You can’t print oil.
the BoA CEO died of heart attack. Shareholders sued him/BoA.
This has been an extremely interesting year. I moved to Houston in 2012 and have been experiencing the area’s boom town dynamic. Houston is booming because Texans do everything right and this recent dip in oil prices is nothing like the 1980s because This Time It Will Be Different. You see, we have a medical center now, so we are diversified.
Anyway, I’ve been anxiously following the semi-annual regional economic forecasts that the University of Houston’s business school produces. Of course, they are extremely bullish, but the per-sector employment and manufacturing stats they analyze are very interesting: http://www.bauer.uh.edu/centers/irf/docs/PDF-Final-Fall-Symposium-Presentation-2014.pdf
Houston had a booming manufacturing and fabrication sector which supported fracking and offshore drilling. It has slowed its growth since 2012 and even started going negative early this year. There was a spike in oil sector employment in 2014, but it was mostly related to Exxon moving its main campus just north of Houston and a spurt in petrochemical and refining facilities. With the coming Hallibruton/Baker Hughes merger, there’s a lot of talk about job cuts and I can image there will be many more as smaller upstream companies are acquired or liquidated as junk debt dries up.
The UH forecasters and the majors are banking on the refining and chemical businesses to balance the coming loss in upstream. It’s going to get very interesting. I think Houston’s local economic data may be a “canary” in the oil business coal mine worth watching. The next forecast is slated for May 2015, just before the next OPEC meeting in June.
Interesting.
FYI Wall Street last week, in its last gasp pre OPEC announcement, floated a rumor that “okay, KSA is going to refuse to cut production and the rest won’t try to outvote them, but they have agreed to meet again in February”. That was the last ditch effort to take the edge off what was going to happen.
As you note, February was nowhere in the announcement. They won’t touch this again until June.
TransCanada’s Energy East Pipeline Will Cost Quebec Economy $100M Annually, Says Provincial Gas Provider
Steven Guilbeault, Desmog.ca, Thu, 2014-11-27 12:37
Ovi Colavincenzo posts this:
Every week I track the US C+C oil production and the year over year (YOY)
incremental production as provided in the weekly EIA report. I am not clear
how they collect this data so quickly and its accuracy, since the EIA also
publishes monthly data and the latest update is July.
Below is a chart that shows the incremental YOY C+C production and a trend
line after the peak was reached in early 2013. If the trend were to continue,
the incremental YOY production should fall below 1.0 Mb/d around mid-year
2015. The slope of the trend line is -124 kb/y.
It will be interesting to see if the WTI price drop will accelerate the overall
decline rate, which is about 1.4% based on the current production rate of
9077 kb/d.
Could someone clarify what is meant by well completions? Is it the final job,
fraking, or more than fraking?
Ovi, well completions are just that, complete and on line. A well completion is a well that is now pumping oil.
In my world completion means the activities which take place after drilling. This involves hydraulic fracturing, but also running the tubing and other equipment the well will use for production, up to installation of the Christmas tree. A completed well may not produce until it is “hooked up”. This requires a flowline, and connection to facilities we use to degas and remove water. IN some cases wells may not be hooked up and produce for months after completion. This depends on the location and company philosophy.
Sadly for KKR and Samson, all Samson’s assets are mineral rights to non-conventional oil fields.
Yes, it is dire, a gamble gone wrong. It is the very worst of possible scenarios to go all wrong. Just the pits. All done for practice, just for the fun of it.
However, the trains will continue to haul Bakken oil to the refinery financed by Delta Airlines to refine 65,000 barrels per day.
There will be at least 65,000 barrels per day produced, that’s for sure.
I suspect much more.
Delta can do without the other oil from someplace else. They don’t care anymore.
Asia has opened with oil now at $64.74 down $1.30.
Euro, GBP and Yen down, but not sharply.
A strong dollar is this time just contraproductive for the US economy. If the US would be a large oil importer this would be very beneficial for the US economy (remember 1998). However a strong dollar is for the US economy now just a shot in its own foot as the US is now a large oil producer and a strong dollar just drives down the oil price even further. Energy in the US is today a trillion dollar industry (including natgas and coal). Prices are down now 40% which is 400 bn USD per year less revenue and a huge damage to the high yield market. HYLD has already crashed by over 15%, JNK and HYG are on the brink of collapse. This will have serious consequences on the availability of consumer loans. China and India on the other side benefit hugely from a low oil price. The Shanghai stock market is just soaring ahead. Mumbai in India hits one all time high after another and also the small emerging countries like Vietnam and Phillippines are very strong. The big surprise here is also Mexico. The latest weekly AAR rail indicator for Mexico shows 70% growth YOY. I have never seen any growth rate like that. The world is on the cusp of a huge growth wave.
If the US would be a large oil importer this would be very beneficial for the US economy
By my lights the US imports quite a bit of oil…
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRIMUS2&f=A
True. Yet the US imported close to 10 mill bbl per day just a few years ago. So, the picture has substantially changed and is an important part of a stronger dollar and lower trade deficit. However the dynamics have changed. The US became more of an energy producer and has to face also the consequences of a low oil price – maybe not as hard as Russia – yet there is an impact.
I must admit that I am more confused from one day to the next about the total cost of tight oil. Some people say it is close to or even considerably over a hundred bucks. Others say some tight oil is profitable at sixty dollars.
And SOME tight oil might be profitable at even less than sixty bucks.IT is still a more or less free country and the reader is free to believe anybody he chooses.
But at any rate it does seem VERY likely that a whole lot of companies in the industry are going to go belly up if prices don’t rise soon and fast- and maybe they aren’t going to be profitable even at a hundred bucks plus.
A lot of folks who comment here are of the opinion that the tight oil industry was in deep trouble even before prices started down.
But it is just about certain imo that oil prices will be going back up soon due to the steady decline of legacy production and the apparent fact that a lot of oil costs close to if not more than a hundred bucks to produce.
There just aren’t any low cost high quality oil virgin oil fields left..So pretty soon the price either has to go back up high enough to support high cost marginal production …or we start using substantially less year after year.
As it happens I have a very old friend who is an attorney who specializes in real estate and bankruptcy and we have had many a long discussion of the law and farming while enjoying some fishing and some local artisanal whiskeys and brandies of the sort available only in extremely limited quantities- so limited the only way to get some is to know the makers -personally.
So -here is a conversational summary of what he has to say about bankruptcy. Note- He has zero experience in the states where the tight oil industry is located and no experience in oil or mining. I posted this yesterday but have worked it over and added to it for today.
xxxxxx
Exon and Chevron are big guys in Oil. Gold in Sacks is a big guy in banking.CLR and EOG are wannabees in comparison.There are plenty of take over artists both in and out of the energy industry or any industry out there with billions at their disposal who may or may not know anything about oil or any given business but you can bet they know how to read a set of books .
The real books- not the cook books- will be entered as evidence.
At firesale prices any industry is a whole new ball game. The new owners- if there is an industry fire sale- will not be burdened with any EXISTING debt.It will be extinguished one way or another in bankruptcy court.
So-IF one dollar is all an existing flowing well is worth -then that is probably what it will sell for. The old legal phrase ” one dollar and other good and valuable considerations” can be interpreted and has been interpreted often as ” one dollar and the previous owner gets the valuable consideration of leaving this courtroom without worrying any more about the millions he lost.”
Nobody will bid on a tract or well unless he THINKS it has real value. OF course that value may not actually exist, or it might exist only in the form of an opportunity to resell it to a sucker.
ANY ASSET that is generating cash after the debts associated with it are wiped out will generally sell for something- maybe for a lot depending on the amount of cash and how long it is expected to come and the costs of managing that asset.
So a well making a hundred barrels a day will sell.A well a thousand feet away producing ten barrels a day- now that one may go unsold- or for a dollar to somebody who has set up a corporation in order to gamble that oil will go up to the point they can make some money on ten barrels a day for however long the well will last……..IF the new owner must post a bond for the cost of properly closing the well then in that case it may become the unwanted property of one or another government- a city county state or UNCLE.
IF the folks appointed to manage the sale are competent they will set up a process to screen bidders for financial muscle essential to taking over a tract — one way or another.There are various ways this can be done but I am not well enough acquainted with them to say any more than that they exist. ONE way is to require that the bidders post a bond to ensure they can’t walk away leaving a mess for the judge to be bothered with again next year or a couple of years from now.
Good administrators will bundle the worthless tracts with wells that must be plugged at once or very soon with wells that are good producers.This will ensure that there are buyers for all or most wells assuming there are still some wells making good production.ENOUGH wells making ENOUGH production.
In the event there are contractual or regulatory or statutory law conditions that apply to separating or bundling tracts in order to realize the most money at the sale then the court GENERALLY has the authority to do what it deems is in the best interest of creditors and the public.The welfare of the public is supposed to be a paramount consideration so a bankruptcy judge will not ok the dumping of hazardous waste or that sort of activity.But he might void a local zoning regulation or a local tax levy or something of that nature.
The rules are ordinarily as cut and dried as the rules of any game.The judges are the referees.The results when the lawyers play are variable as in any game.
BUT –If the case is big enough anybody at all can come out a winner or loser depending on the amount of clout that ”anybody” has – for instance labor unions were put in front of secured debt holders in the GM bailout although this sort of surprise is very rare..The people who loaned that secured money absolutely believed they were FIRST in line in the event of a bankruptcy.
My guess is that there will be a lot of bankruptcies in the industry but that a some companies with decent assets will be bought up and kept afloat by new owners with deep pockets and that at least a few companies will weather the price storm on their own. It seems reasonable to assume that at least a few tight oil operators are using their own money and that some of them must have been making money if the true total cost of SOME tight oil is down in the seventy dollar range.Maybe it is. Maybe it isn’t. These operators if they exist will make money again when the price of oil goes up again-if it goes up soon enough.
Yogi sez predictin is hard . Specially the future.
I am not a lawyer and have only tried to repeat the gist of a lot of stuff we have talked about at different times while ” under the influence ” part of the time and paying more attention to the fishing than the conversation at other times if they were biting.
The welfare of the public imperative is what was used to backstab the GM bondholders during their bankruptcy. Of course one Administration feeling that the UAW getting a seat on the board (and so the bondholders must be wiped out) was in the public’s interest might not have been another Administration’s feeling.
Point being it’s a bit like the old claim that after a man has sought legal remedies and come up empty, he can always turn to Smith and Wesson (sort of like some Egyptians have to think about the next few days).
In this case, the Fed is Smith and Wesson. Bankruptcy law doesn’t achieve primacy of someone decides following the law is too dangerous.
But if the Bank of England is starting to realize that fossil fuels in the ground may not be exploited because of global warming concerns, then perhaps the market for these bargain-priced assets will disappear. Who wants to buy a well if you can no longer sell what is in that well?
A well producing 10 barrels per day is likely to deliver very good cash flow. Think about it, 10 times 50 times 30 = $15 thousand dollars per month. The key is to maintain the well and associated equipment well maintained.
Fuel to the fire…
Bank of England to examine financial risks linked to fossil fuels
Pilita Clark, Environment Correspondent, FT.com, November 30, 2014 8:10 pm
The Bank of England isn’t well known for their knowledge about oil reserve ownership, neither do they know much about climatology. If Lord Stern is an example of the quality of their management…God Save the Queen.
Ron:
My take is that we reached peak oil in the 2005-2008 period if we measure it in terms of net energy or wealth rather than barrels. Fracking based on QE debt may have created more barrels but net energy and wealth declined. Your view please?
Well you may very well be correct. But what can we point to to prove that point? How can we show the peak oil deniers that we are already past peak oil? I think, very soon, that we can simply point to the EIA data and say: “Here is the data, the EIA has us well past peak oil, now argue with that”.
And as I have periodically noted, it seems likely that we have seen little or no increase in actual global crude oil production (45 or lower API gravity crude oil) since 2005, while global natural gas production and associated liquids–condensates and NGL–have (so far) continued to increase.
Lukoil executive predicts significant fall in Russian oil output
One of Russia’s top oil executives has warned that falling oil prices and western sanctions will lead to a bigger fall in Russian oil production than previously forecast, putting the country’s output on a similar trajectory to the declining North Sea.
Mr Fedun said Russia had previously faced two possible scenarios, of a “slight” decline in oil production from next year, or a more substantial decline, as ageing west Siberian fields reach maturity.
But he said the combination of lower oil prices and US and EU sanctions imposed because of Russia’s intervention in Ukraine were pushing output towards the “pessimistic” scenario.
Lukoil are arguably the least cowboy of the Russian operations. They’re very conservative in both their approach to production (they’re not pumping their fields flat out) and more so in terms of how the business generally operated. I had a meeting there once, full of serious, stodgy old Russian guys who didn’t really take any shit. I think you can certainly take what their executives say at face value.
Agreed. Never met any high level Lukoil people but worked with a number of Russian petroleum engineers and scientists; found them to be conservative non bull shit types who knew what they were doing: except when it came holistic health and vodka.
Lukoil has good management and excellent political connections. The most pragmatic approach for the Russians is to slow down well maintenance (within technical constraints), reduce drilling activity, and cut production. This will send a message to the Europeans to back off their aggressive stance in Ukraine.
hahaha
http://fuelfix.com/blog/2014/11/30/oil-companies-produce-more-for-less-as-crude-prices-fall/
Despite dropping oil prices and reduced capital budgets, some companies are saying they expect to produce more oil next year.
They’ll do it by focusing on the best parts of shale plays, and by taking advantage of continuing improvements in drilling and completion methods.
Houston-based independent Halcón Resources, for example, says it will deploy half as many drilling rigs as originally planned, but still expects to pump as much as 20 percent more oil.
Okay then, Halcon won’t have any reason to refuse to pay in advance for sand and trucking.
Not so much specific to what you’re saying, but oil companies are in the business of producing money – and they happen to use oil to do that.
My guess is that most oil companies would rather produce less oil if it meant more profit.
To oil companies oil is a means to an end, not an end unto itself.
rgds
WP
Shareholders of Halcon do obviously not agree: the stock is massively down to around 2 from 7 just a few months ago.
Just Don’t Call It a Lab
By Sandy Keenan, NY Times, NOV. 26, 2014
IF we were to manage our collective affairs rationally we would have a pretty good shot at pulling thru the fossil fuel depletion bottleneck more or less whole.
I am utterly convinced that in a few more years the amount we pee away on JUST ONE nice but not really needed new car will be enough to upgrade a conventional new McMansion into a real net zero energy mansion. IT will cost considerably more to retrofit an older house to net zero- so much that it probably simply can’t be done but getting half or three quarters of the way there is probably going to be realistically doable-IF we manage things properly.
A big part of this management is going to be making easy credit for the upgrades available in the same way that easy credit is available for the purchase of cars and trucks. If a typical homeowner can borrow enough money to more or less wipe out his utility bills and the NET payment on the borrowed money AFTER considering the much reduced utility bills- is manageable then he or she is apt to go for the upgrades.
Getting the costs down will involve changing a hell of a lot of beuracratic roadblocks into green lights and is going to be a hell of a job but it will happen a little at a time I hope.
AND of course getting the cost down involves scaling up the industries involved in doing the upgrades.
But in the end efficiency and conservation are going to be substantially cheaper than the status quo.
The question is not going to be whether you can afford a Leaf or a Volt as the second car but rather can you afford NOT to have one as your second car?
The only real long term hope for the hard up driver is that there will be enough cheap used electrics and plug in hybrids on the market that he will be able to buy one.
I met a man recently who has managed to upgrade an ordinary electric golf cart to the point he was able to register it for highway use.He tells me it will go twenty five miles or so without discharging the ordinary lead acid batteries enough to damage them and that he is has to call on a friend or relative with a conventional car maybe once or twice a year to go someplace he MUST go he can’t go with his golf cart.
His BIGGEST ongoing expense is the necessary and legally mandated liability insurance policy. His cart will last him more or less indefinitely given that it is mostly fiberglass and has only a few mechanical components subject to failure which are easily replaceable.The combined cost of replacement batteries and juice to charge them is less than the cost of gas even now.
Now it does use a little bit of fossil fuel on a cold day since he has installed a small propane fired heater but he says a single bottle of the size most people use on an outside grill lasts him just about all winter. His typical trip is short of course and seldom takes over half an hour both ways.
His top sustainable speed is twenty five but he can hit thirty or thirty five for a minute or two with his cart. Says it is dangerous to go over twenty five due to inadequate brakes and poor handling characteristics. Usually goes ten to twenty on residential and not too busy streets with twenty five mph speed limits.
This ordinary used golf cart was upgraded to its current capabilities in a backyard garage for less than four thousand bucks.The job could no doubt be done cheaper in a factory setting.
They forgot to mention the field station’s surface area, and whether the lab equipment generates heat. I tend to see these articles as “green fluff” because they neglect to give key details.
I owned a house in Chicago, we completed a full basement with a well protected family room, a bedroom, and other utility areas. This allowed us to stay cool in the summer if it got hot. In winter we ran a low gas bill because we had double windows. When I lived in Moscow we had a similar set up, but used triple pane windows made in Finland. We did quite well down to minus 40 degrees C. But this high class insulation was only justified as a safety measure, we just didn’t know how reliable would be the gas and electricity supply in the first years after the USSR went belly up.
Committee opts for energy efficient design for new Hornby Fire Hall
Michael Briones/Echo Staff / Comox Valley Echo, November 20, 2014 01:37 PM
A ten to fifteen year payback for a comfortable and resiliently designed building. Let’s hope this municipality sensibly looks past the first cost.
Who owns all the high-yield debt issued by tight/shale oil companies? Which banks and other institutions? We need to watch them for cracks.
As best I know, the public has them. HYG and JNK are high yield ETFs. You can track them like a stock and they will reflect the fund creator’s internally defined index.
If the debt is dispersed amongst the general (albeit probably high-end) investing community, I don’t see how this could cause a systemic financial breakdown like we saw in 2008. I’d be on the lookout for concentrations of it in weak banks, municipalities, pension funds, etc. for it to really be something the Fed would start to look at bailing out.
Anon, you, like almost everyone, does not understand Credit Default Swaps. THOSE are what threaten systemic destruction.
One more time. A CDS is an insurance policy on a debt instrument (a bond). It is a risk swap from someone to someone else. If the debt defaults, the insurance policy pays off. They originally were to be a way to manage interest rates but any piece of paper that can be bought and sold and a commission collected is going to grow. Period. Sales commissions guarantee it.
There has been an attempt to regulate them, but they are simple legal contracts and they can be global and do not require the writer or buyer to be parties to the debt itself and can be largely immune to regulation. They are the ultimate derivative. There can be trillions of dollars of them and no one would know.
That would be the mechanism for a widespread HY default by frackers to become global and systemic. It doesn’t mean that such at thing is true or exists HY bonds are seldom swapped), but the number of HY bonds issued to the public does not describe the magnitude of systemic risk. They just provide a match for a fuse.
Insurance without regulation, just mythical backing.
Pretty much. This is why activity froze in the Lehman event. No one knew who was or was not solvent. The Lehman swaps triggered and their counterparties were suddenly also at risk of being insolvent so their swaps were going to trigger, too, and so on and so on.
Much of the attempt to be calm about these things since 2011 or so is the measure of gross vs notional swap positions. An entity holding a swap on some debt my also have bought identical swaps. But this is a bit rare. Rather, industry wide, the net notional of swaps may near balance. The problem is the gross swaps outstanding can take one company under while the rest of the industry’s net notional is near zero. Then that company’s swaps trigger and the same avalanche is there.
No telling if Barclays have a zillion CLR swaps outstanding. Very possible.
200 trillion out there somewhere.
If they would’t bailed AIG, this puppy would probably of gone into the ditch.
An added problem with CDS is that the original intend was to hedge risk against a particular bond (issue) but what has happened over the year is that CDS, and especially CDS index swaps (a CDS on a basket of reference bonds) way outnumber the actual underlying bonds which exist. It is quite common for there to be a multiple of CDS to exist relative to the underlying bonds.
One reason for this is that a lot of, certainly longer maturity, bonds, are effectively locked up by “real money” like insurance companies and pension funds who need long dated assets. Therefore those bonds are not available to own to other people. However, if you think that one of those bonds will on a relative basis outperform the market you can buy sell CDS on it while buying CDS on an index (as a proxy for “the market”).
AIG was a poster child of enabling the creating of way more CDS than there was underlying because the notion was that “the market” was stable and longs would offset shorts (risk wise). We all know what happened then.
Rgds
WP
Bonds are at nose bleed heights.
They maybe the catalyst that brings this tumbling.
I’d argue that what is a real problem for fraccers is the choice of capital structure (very debt heavy). If they had less debt/ more equity it potentially would be easier to weather $60 oil….
rgds
WP
“Extreme Cold Air to Hit North Dakota on Monday December 1, 2014”
Report from YouTube’s favorite weather man:
https://www.youtube.com/watch?v=Wpevm7WLgmU
Europe is open and trading.
Dollar up against everything.
WTI $63.98 (!!!)
Oil is doing the limbo.
http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html
As a reminder, there is still glaciation taking place on Antarctica and has been for the last 100,000 plus years. It is an ice age down there. Spring, Summer, Autumn, and Winter, all cold climate each and every day, month after month, year after year.
The earth is merely warming some during this existing cooling period. Some more CO2 being belched into the atmosphere is a mere glitch on the graph.
If you don’t believe me, take a trip to a mountain state or to the Himalayas or the Andes. Those mountain tops in Alaska are covered with snow and accumulate snow masses so great they become glaciers.
When Antarctica begins to melt night and day, that’ll be global warming. As for now, it is still an ice age and will continue as such.
Really now? Do you actually expect anyone to believe that only melting of the Antarctic ice cap, day and night, will be proof of global warming. The nights there are six months long, and not until the ice is melting there at night can we prove global warming? Good Grief Charlie Brown!
UN climate talks begin as global temperatures break records
According to the US National Oceanic and Atmospheric Administration (NOAA), the global average temperature over land and ocean from January to October was the hottest since records began in 1880.
I am not trying to say that there is no global warming and it is not anthropogenically caused. Human activity has contributed to the CO2 levels by 40 percent, from 280 ppm pre-industrial revolution to 395 ppm today. It has happened. All of the CO2 in the atmosphere prior to the beginning of the Industrial Revolution has been replaced by the burning of fossil fuels.
In a hundred thousand year timeline, the amount of CO2 increases from man made causes are a tiny bubble, a glitch, during that 300 to 500 year period, extending out to a 1000 year period of increasing average temperatures, maybe 1500 years, then expect the cooling trend to continue with decreasing average temps from there on out to a new ice age.
A new ice cap will form.
If the ice core sample analysis, the data, is correct, that is what will probably happen in less than ten thousand years from now. The earth is going to cool once more.
Hi Ronald,
It takes a long time for the earth system to sequester the excess atmospheric CO2, probably more on the order of 100,000 to 200,000 years to get back to pre-industrial levels of CO2. Then the cooling might begin, though it depends if we reach a tipping point that has unexpected effects such as a release of methane from frozen tundra, changes in the cryosphere and so forth. Many of these processes are not well understood and humans should try to err on the side of caution.
Certainly the Ice Age/Warm Periods are well understood, and have been attributed to the Milankovitch cycles. We are also now nearing the end of the current warm (Holocene) period.
Some scientists have speculated that human caused increases in CO2 may be delaying the next ice age. If this is true, then it would certainly be a positive effect of Global Warming.
http://www.bbc.co.uk/news/science-environment-16439807
Hi JohnB,
The problem is that the rates of increase of atmospheric CO2 are much faster than a typical glacial/ interglacial cycle. The flora and fauna of the planet may not be able to adapt well to the rapid change that is occurring. A little CO2 might be good, but like most things moderation is the key, a change from 280 ppm of CO2 to 560 ppm over a 300 year period is far from moderate.
There are very few scientists that know much about the climate system that suggest that 560 ppm of CO2 is a good idea, 350 to 400 ppm might be ok, though our understanding of the Earth System is far from complete and it would be wise to aim for 350 ppm rather than 450 ppm (or higher).
Since records began, 50 years ago, mean annual temperatures on the Antarctic Peninsula have risen rapidly. A total increase in mean annual air temperatures, of around 2.8 °C makes this the most rapidly warming region in the Southern Hemisphere – comparable to rapidly warming regions of the Arctic. Turner, J., et al. (2005), Antarctic climate change during the last 50 years, Int. J. Climatol., 25, 279-294.
Ronald Walter,
The Antarctic is melting. However, you wouldn’t know it if you just looked at the Satellite picture of increased size of Antarctic. The Antarctic is melting from underneath and they found this out by using REAL SCIENCE. Robot gliders were sent below and found warm water melting the Antarctic Ice Shelves from below:
“What we’re looking at is delivery of heat right up to the ice shelf, where the ocean touches up against the ice,” said lead study author Andrew Thompson, a physical oceanographer at Caltech. “It’s almost like a blob of warm water, a little ocean storm.”
Read more: http://www.mnn.com/earth-matters/wilderness-resources/stories/robot-gliders-study-antarctic-ice-melt-from-below#ixzz3Kf44D1VP
——-
Two things are taking place currently in the Antarctic:
1) the Northern Arctic is heating 4-6 times the rate of the planet thus normally very warm air from the Equator would go north, but a percentage now heads south. More warm air heading south to the Antarctic increases the temperature gradient causing the winds to move even faster which actually promotes colder air, freezing the surface of the Antarctic.
2) As the warm water underneath the Antarctic melts the ice, there is more fresh water that is released at the surface. Fresh water freezes at a higher temperature than salt water.
So… more warm air coming from the Equator hitting the huge Antarctic polar winds creates faster winds which freezes the fresh water from the melting Antarctic from below. This makes it appear as if the Antarctic is actually growing, while IN FACT, its overall ICE VOLUME is decreasing.
GLOBAL WARMING IS HERE whether we like it or not.
steve
I take a trip to a mountain state (Colorado) every summer, and I have photos to show substantial melting of glaciers in my own experience.
A woman in Estes Park sent me an email and said thank you for my “now historic” glacier photos — because much to everyone’s surprise, the bottom 2/3 of the Tyndall Glacier (ironically, named after the scientist who discovered, in about 1850, that CO2 is a greenhouse gas) fell down the mountain and melted.
Mountain glaciers are melting all over the world. It is predicted that before long there will be NO glaciers left in Glacier National Park. Think on that.
This is good for a laugh with you morning cup o jo. I mean, really, the EXPERTS are puzzled? Hardi har har… where’s my pipe? Too early for a cocktail? I can’t stop laughing.
Thanksgiving Sales Slide, Both at Stores and Online
By HIROKO TABUCHI
Sales were estimated to have dropped 11 percent, to $50.9 billion from $57.4 billion last year, according to preliminary survey results, puzzling experts who predicted strong growth.
http://www.nytimes.com/2014/12/01/business/thanksgiving-weekend-sales-at-stores-and-online-slide-11-percent.html?hp&action=click&pgtype=Homepage&module=first-column-region®ion=top-news&WT.nav=top-news
There is a seasonality to oil price, with the northern hemisphere winter months of Dec-Feb tending to have the lowest prices (attached figure). Some of the current price collapse is likely due to this seasonal fluctuation in price, perhaps $5.00/bbl or so. One might predict an escalation of oil prices starting around March 2015. Of course geologic (e.g. increasing scarcity of east-to-extract oil), economic (e.g. the Great Recession) and geopolitical factors (e.g. the so-called “Arab spring”) can cause much stronger price swings in periods less than 12 months, so the seasonal signal can be overwhelmed.
-best
Thanks. This is the third factor, together with the,
1) increased oil supply from US shale oil and Libya (which returned to the market with almost 750000 bbl/day),
2) slowing down in Chinese demand (from +10% to +2.5% yearly) and the continued fall in European demand,
which caused the massive fall of oil prices recently.
Libya has been reporting its major fields offline more off than on for about 3 weeks now.
yes I saw that, but the negative sentiment of those three factors together is still strong enough to be the main driver. However, (also comparing with 2008) I expect the price to reach the bottom between December and February
Dean,
“…Libya…returned to the market with almost 750 000 bbl/day”
Is that figure production or announced (somewhere) export? I still have seen no export figures but I keep looking.
Libya, in October, produced 842 thousand barrels per day. I have no idea what they produced in November, or are producing today.
Hi Ron,
Good chart thanks, maybe that extra 650 kb/d over the June to Oct 2014 time frame is part of the “glut” of oil, that is a pretty big move from 200 kb/d to 850 kb/d over a 4 month period. Add in the 250 kb/d US increase over the June to Sept period and we have 1.1 Mb/d added to World supply over those 4 months (if there was no US increase in October). These gains may have been matched by decreases elsewhere (Russia and Iraq perhaps?)
Interesting.
The main increase in production, August to October, was Libya and the USA. But, August to October world oil production was up about 1 million barrels per day. Though Libya and the USA were the only two nations with large increases there were several nations with small increases.
From the IEA in October:
Global supply rose by almost 910 kb/d in September to 93.8 mb/d, on higher OPEC and non-OPEC output. Compared with a year earlier, total supply stood 2.8 mb/d higher, as OPEC supply swung back to growth and amplified robust non-OPEC supply gains of 2.1 mb/d. Non-OPEC supply growth is expected to average 1.3 mb/d 2015.
And from the IEA in November:
Global oil supply inched up by 35 kb/d in October to 94.2 mb/d. Compared with one year ago, total supply was 2.7 mb/d higher as higher OPEC production added to non-OPEC supply growth of 1.8 mb/d. Non-OPEC production growth is forecast to ease to 1.3 mb/d for 2015 from this year’s 1.8 mb/d high.
Though they are talking total liquids here world C+C was up a similar amount these two months.
Thanks Ron.
How do we know the increases were mostly crude plus condensate? One problem with IEA data and OPEC’s non-OPEC data is that it is all liquids. I realize that we know what happened to US and OPEC crude plus condensate, but couldn’t any increases from Libya and the US be matched by a fall in C+C output in other countries and at least a portion of the rise in total liquids output be a result of increased NGL, biofuels, or refinery gains?
I don’t feel confident about C+C for the World until I see the EIA data which only goes through July 2014 for now.
Well I actually looked at the JODI for September and saw the increase in several nations production. I don’t like to use the JODI database but they are two months ahead of the EIA so they do come in handy on occasions.
I am confident that when the EIA September data comes out in a month or so they will show a huge increase in September. (The August data is overdue now.) The September data may surpass the February high. At any rate the two will be pretty close.
I think there was an increase in supply which caused a large part of the price crash. But the economy also had a lot to do with it.
Ambrose Evans-Pritchard sometimes writes some really interesting analyses. Other times not. His latest musings on the oil price seem more like desperate corporate propaganda.
” Opec has misjudged the threat. As late as last year, it was dismissing US shale as a flash in the pan. Abdalla El-Badri, the group’s secretary-general, still insists that half of all US shale output is vulnerable below $85.
This is bravado. US producers have locked in higher prices through derivatives contracts. Noble Energy and Devon Energy have both hedged over three-quarters of their output for 2015.
Pioneer Natural Resources said it has options through 2016 covering two- thirds of its likely production. “We can produce down to $50 a barrel,” said Harold Hamm, from Continental Resources. The International Energy Agency said most of North Dakota’s vast Bakken field “remains profitable at or below $42 per barrel. The break-even price in McKenzie County, the most productive county in the state, is only $28 per barrel.”
see http://www.telegraph.co.uk/finance/oilprices/11263851/Saudis-risk-playing-with-fire-in-shale-price-showdown-as-crude-crashes.html
However only a few days ago he wrote some great lines about gold bugs.
“For many gold enthusiasts it is an article of faith that QE would set off an inflationary spiral. Yet years have passed and much of the world is languishing in near deflationary conditions. Their economic models are clearly wrong, yet hardcore gold mysticism is a closed-belief system, almost religious in character, and therefore not falsifiable by facts. Advocates merely dig in deeper. “
If most of the larger tight oil producers have locked in prices for the coming year then they will be ok for that long. I personally don’t know how much oil is sold by contract as opposed to on the spot market but I assume that nearly all oil produced by larger producers is sold by contract leaving very little as a percentage of the total market to me sold at spot prices.
Maybe some of the smaller producers sell mostly in the spot market. If so they are in deep doo doo.
I have been speculating all along that it is going to take the oil industry six months or more to reverse course in terms of hiring and contracting personnel and equipment and fulfilling existing contracts- at least this long.
MY personal guess is that oil will be going back up within a year. The folks who are locked in for the next six to twelve months are probably holding off on signing any new contracts at all until they see which way the market is heading.
Some producers are probably finishing up some contracts right this minute that will not be renewed and my guess is that production by some little guys in the tight oil fields is already falling off- but probably not enough yet to be noticeable..
ENOUGH PRINTED MONEY will no doubt result in inflation.
But a LESSER AMOUNT of printed money will only OFFSET deflationary pressures.
The goal of a central bank – supposedly and hopefully- is to maintain a reasonably steady and safe and predictable economic environment. So-
When deflation threatens due to hard times then the central bank will generally put in place policies that hopefully will stimulate the economy and maintain demand to such an extent that prices hold steady or go up very slowly.
If the central bank prints less than enough money deflation will still take place. If it prints too much then there will be TOO MUCH inflation. Most people fail to understand that central bankers usually and historically try to inflate their currencies at a couple of percent a year.
So printing is like the Goldilocks story with the bears porridge being either too hot or too cold or just right. The idea is to hit the print button just right and hold prices steady or rising slightly.
Given how tricky this can be in the real world I suppose the Fed must has not done badly in managing the print button.
Based on recent results, I think they misread what would happen to that extra money. Relatively little of it has gotten to most of the population. Industries aren’t expanding and hiring people.
It has resulted in inflation, but only in assets that the very wealthy trade: high end property, stock market, etc.
For those who are interested, the first 24 hours of production for Permian wells is reported to the Midland Reporter-Telegram. They also report 24 hour water and gas production:
Midland Reporter-Telegram Oil
Here they give links to weekly completions for the last five weeks. Clicking on the latest one we get:
Completions 11/23
Then search on ” 24 hrs ”
Here you will get a few fairly good wells but most look like real stinkers. The first three are copied and pasted below, bold mine:
Artesia Yeso Federal Unit #18
Artesia; Sec 21 T17S R28E; 1900/N & 406/W; EL 3634 GL, TD 4913, PBTD 4869; Spud 4-3-14, Comp 4-24-14; production is through perfs: 3927-4748. IP: 5-11-14 Pump 24 hrs 15 BO, 1368 BW, 100 MCF. Csg: 8 5/8 @ 403 w/200 sx, 5 1/2 @ 4913 w/800 sx, 2 7/8 @ 3837; API #30-015-41358
COG Operating LLC
Arabian 6 Fee #10
Atoka; Sec 31 T18S R26E; 150/S & 210/W. BHL: 359/S & 495/W; EL 3446 GL, TD 7750, PBTD 7673; Spud 3-18-14, Comp 5-16-14; production is through treated perfs: 3156-7680 Treat: Acdz w/39,969 gals 15% HCL, Frac w/1,712,899 gals gel, 238,215 gals waterfrac R9, 186,299 gals trt wtr, 3,008,170# 30/40 brown sd, 477,174# 16/30 CR, 51,933# 100 mesh. IP: 6-13-14 Pump 24 hrs 27 BO, 3105 BW, 10 MCF, GOR 370, Gty 38.6. Csg: 8 5/8 @ 1232 w/1850 sx, 5 1/2 @ 7729 w/1500 sx, 2 7/8 @ 2360; API #30-015-42004
Oxy USA Inc.
Osage 18 Fee A Com #1
North Seven Rivers; Sec 18 T20S R25E; 330/S & 1800/E. BHL: 292/N & 1675/E; EL 3560 GL, TD 6897 MD, 2500 TVD, PBTD 6821 MD, 2484 TVD; Spud 3-6-14, Comp 5-14-14; production is through treated perfs: 2875-6757. Treat: 29,913 gals 15% HCL, 65,816 gals 15# linear fluid, 668,402 gals 15# BXL, 188,812 gals 15# BX. IP: 6-6-14 Pump 24 hrs 132 BO, 797 BW, 67 MCF, GOR 508, Gty 39. Csg: 8 5/8 @ 710 w/690 sx, 5 1/2 @ 6897 w/1050 sx, 2 7/8 @ 1817; API #30-015-40759
You will notice that the initial production was several months ago. I don’t know what to make of this. Perhaps Mike or someone else can tell us.
No idea if this is an answer, but an average 8 inch vertical bore 10,000 feet long is over 2400 barrels of volume.
If it’s still filled with water from the fracking, this has to come up and clear first before oil could?
You know, I really think they are aware that they have to get the majority of the fracking water out of the way before they can start counting. I know they cannot get it all out and some fracking water will be coming up for days to weeks later. But what comes up first will likely be all water. I just have the strangest feeling that they know that.
They reported what they reported.
Actually maybe there is some regulatory reqt that they wait some period of time before reporting oil — but fracking is pretty new to expect that kind of regulatory granularity, one would think. If it was in place, IP would have some different definition.
Just looked around. No definition appears even in Texas regs of IP being anything other than “oil produced at the outset of well production.”
Ron, a Texas operator has 30 days from the time it commences testing of a new well to file its completion reports with the State. At any time during that 30 day period it can more or less pick a 24 hour test period for IP reasons it likes. You will notice in your example that all IP’s are reported within 30 days of “completion.” There is no discerning produced water from flow back frac water for filing purposes. It can take months upon months these days to get completion reports processed and made available to the public, and newspapers.
The first well in your example is a shallow vertical well, the second looks to be a deeper well deviated from vertical with a small frac and the 3rd a fairly shallow horizontal lateral with a little bit bigger frac. None of them great and all making lots of water, but I don’t know what they cost. In Texas we never tell a man his date is ugly, so I ain’t saying stinky or not.
The price of oil has fallen so quickly that I would suspect there has been no turn down in new drilling permits being filed… yet. It takes months to get them processed as well and then, in Texas, they are good for 2 years. Permits are not expensive to file and can be walked away from with no penalty whatsoever. I do not believe permits are as much of an indicator of ill health in the oil patch as rig counts. Rig counts are pretty accurate and very objective (Baker does a good job of that) and tell the tale. I never understood, nor paid much attention to, wells awaiting frac’ing. Besides frac’ing companies and operators wanting to appear busy, who keeps track of that, I wonder?
Mike
Thanks Mike, I figured most of those low producers were vertical wells. I have been watching these wells for awhile and a majority of them are very low first 24 hour producers like those. If you look at the rest of them at that link, most of them are like that. There is no way that there could be that many really expensive wells producing so little oil.
So we can conclude that the Permian is mostly conventional oil. Or at least I think we can reach that conclusion.
Well, wait a second, if they are vertical, then they have watered out already?
Or as mentioned below, maybe they were drilled vertical in a shale area just to hold the lease, since verticals are cheap. Have to be profitable, but hell, all kinds of ways to measure that.
Watcher, you gotta get your mind out of the shale gutter, man; believe it or not there is lots of smart folks drill vertical wells in conventional resources because they want to, because they are profitable, because they don’t decline 83% the first 18 months of production, because they don’t need to borrow money to do it, because they are cheaper, because, because. Actually, the smarter you are the LESS likely you are to want to spend 8 million dollars on a shale well to earn a 20% rate of return over 20 years, IMO.
ALL oil wells make water, initially and/or ultimately. We work around the water (by injecting it on lease, or water flooding with it, whatever) and still make money. Watered out means water only, BTW. I’ll take a wild guess and say 15 BOPD makes 12 grand a month, net, even with that water production.
Conventional fields, like the one that the Yeso well is in, are generally economic down to 100 BWPD. The lifting cost just isn’t that much, and since these fields have low declines on waterflood they pay out.
Ah it messed up my comment. It should have said economic down to 100 bwpd.
Less than 5 bopd****. Idk what the deal is with what is showing up vs what I type.
Hi Mike,
Thanks for the tip on rig counts, through the end of November rig counts in North Dakota have stayed flat, which I find surprising, has there been a decrease in activity in Texas due to lower prices? Does this usually take a couple of months because hedging?
It will take a full 6 months for 50-70 dollar oil price volatility to show up in shale oil rig counts; blame it on hedging, rig contracts, end of year dedicated budgets, even a flurry of activity before winter, whatever; rig counts will eventually come down. I already see physical changes in the shale industry here in S. Texas, yes.
Understanding the stratigraphy would be important for understanding why wells perform the way they do.
http://www.sepmstrata.org/CMS_Images/Permian%20Geology/Table%20General%20Correlation%20Chart.jpg (still don’t know how to embed images, boo)
The Yeso is shallow, the well is unitized, and has high water production. Probably just acidized. Most likely waterflooded well.
Atoka is Penn in age. Though treated perfs looks like it is probably San Andres through Atoka. Vertical well. They used 100# mesh, which is horrible, and shockingly is was a crappy well. I don’t consider 100# a real frac.
Seven Rivers is not a usual horizontal target, but it is interbedded clastics and carbonates. This is a rather large acid frac, and had decent production. Though Im not sure what pressure they pumped the acid frac at to tell if they actually propagated any fractures.
MBP, I am a GC clastic kind of guy; I get lost in the PB sometimes, thank you. 51K of 100 mesh sand seems like a tail-in frac pack kind of thing to me; it is odd.
I am busy, like you, but I want to help around here as much as I can. If people understand the business better I think they will be less mistrustful of it in general, and with regards to unconventional resources, less trustful of all the hubbub; that’s my goal.
Keep me on my toes as often as you can.
Mike
No need to apologize, the Permian is complex and still confuses me. Geology is my passion, so helping people understand how the differences in geology influence production is something that I like to do (or at least attempt to). Your insight helps me as well since knowledge flows both ways. Cheers.
Big reversal from last night, mostly from bad econ news this morning that weakened the dollar and added $1.50 to WTI from Friday.
HYG is down 0.5%, a pretty big move. That’s mostly following equities down 0.7% but usually it won’t align too very closely and with US Ts yield down 3-4 bps (which should pressure high yield prices upward) clearly the high yield array are still worried about frackers.
Dollar thoroughly trashed today. Someone may have figured this out. 0.59% on the Pound. Huge move. Oil followed the dollar, as it has all along. Gold and Silver and copper ditto.
http://www.cnbc.com/id/102226257
Permits for new wells down 15% in October. Is this due to weather or price or a combination of the two.
Also regarding the Ambrose-Evans Pritchard article, as The Automatic Earth points out, just check what he wrote a few months ago regarding shale:
(quoting TAE in todays blog) : “Ambrose in July 2014: “A large chunk of US investment is going into shale gas ventures that are either underwater or barely breaking even, victims of their own success in creating a supply glut. One chief executive acidly told the TPH Global Shale conference that the only time his shale company ever had cash-flow above zero was the day he sold it – to a gullible foreigner. [..] … the low-hanging fruit has been picked and the costs are ratcheting up. Three Forks McKenzie in Montana has a break-even price of $91. [..]”
And today: “The International Energy Agency said most of North Dakota’s vast Bakken field “remains profitable at or below $42 per barrel. The break-even price in McKenzie County, the most productive county in the state, is only $28 per barrel.“
If people haven’t realized yet AEP frequently contradicts himself on matters economic, even within a period as short as weeks. I have decided he has a shotgun approach to his writing – some of his musings hit the target, others miss, but he just reloads and takes another pop. I think he is essentially a headline grabber, who relies on his audience not remembering what he wrote on a particular subject 2 months ago. It is a shame, because he is at least prepared to take unconventional stand points. His colleague Liam Halligan at the Telegraph is a far more consistent writer (and is Peakoil aware).
From your link:
Permits for new wells dropped 15 percent across 12 major shale formations last month, according to exclusive information provided to Reuters by DrillingInfo, an industry data firm, offering the first sign of a slowdown in a drilling frenzy that has seen permits double since last November.
That is most strange. Permits reached an all time high, or damn near it, in the Bakken last month. There were 335 permits issued in October. November was down however, to 236 permits. But even 236 is not low. Last year permits averaged 223 per month.
The chart below is from: Bakken Blog
“for two, the Barnett shale in Texas and the Bakken in North Dakota, permits rose slightly.”
“Oil and gas jobs are at an all-time high in the state, said Ed Longanecker, president of Texas Independent Producers & Royalty Owners Association – some 414,000 according to TIPRO, a figure that has risen for each of the past five years.”
414 thousands :O, talking about diminishing returns…
If that FIFTEEN percent drop in permits is correct for the industry then we should be seeing an approximately corresponding drop in new tight oil production at some time in the not too distant future
assuming most producers don’t apply for permits a good while in advance of their planned drilling starts. IY have seen comments here to the effect that a lot of drillers to get permits and then just sit on them for various reasons.
Property developers do the same thing for various reasons- a change in rules and regulations may not apply to a grandfathered permit thus saving the developer some money or even saving the whole job.Sometimes regs change so much a job that was practical under the old regs can’t be done under the new ones. And a permit in hand is proof of a sort when it comes time to borrow money than the job will go forward.
So – does anybody know how long it is on average between the time a permit is issued and a well is started? My impression is that a well can be finished turn key from permit to producing in as little as two or there months unless the tracking crews are too far behind.
The frackers will catch up fast if drilling slows down substantially.
Friday, November 28th, four permits were issued, 30115 through 30118. The highest producing well number on that date was 28971.
Of wells currently being drilled, 11% (20) have permit numbers below 27000, 44% (81) have permit numbers in the 27000s and 45% (83) have permit numbers above 27000s. All of those except one are in the 28000s. There is one 30000 well being drilled, #30050.
There is at least 1000 permits issued but drilling has not started on them, likely a lot more than 1000. That is in the Bakken alone. There may be a drilling slowdown but it will not be because of a slowdown in permits issued.
Lots of talk all over the place about this permits reduction. Most of it from Texas that is more resistant to winter than NoDak.
Alluding to a Mike comment, there was much talk about how leases can be held by drilling and producing a few cupfuls of oil rather than pay the big fracking expense. Don’t know if that plays right, but commentary touched on the concept. You can hold the lease by drilling and getting some oil out (with the intent to come back later for the bigger amounts). So . . . this permit reduction could be more severe than the numbers say.
Some of the drilling to happen might be to hold the lease.
Watcher, whenever I can I want to try and dispel old, untrue concepts of the oil and gas industry that often make us sound like devious thieves; take for instance this notion of being able to hold mineral leases with cupfuls of oil. Most mineral leases these days are written with continuous drilling clauses and or something called “Pugh” clauses that are protective of Lessors and their correlative rights. Often if you snooze, you loose. Regardless, all mineral leases are very clear that production required to hold a lease must be in profitable quantities, in other words, the well must make a profit to be able to hold the lease; income must exceed expenses.
In tight oil plays the initial pooled or producing unit might have been something like 1000 acres; call it the Watcher A Unit. The Watch # 1H (for horizontal) holds the entire unit ( in the absence of drilling commitment language in the lease). With downspacing BS those shale dudes can now cram 15 wells in the Watcher A Unit, all the way up to the Watch #14H; whatever. Some leases will allow one well to hold the unit, others say you must keep going or take acreage out of the unit, something like that.
Its in the best interest of the shale operator to hold as much acreage as possible so it will try and form, and drill, as many units as it can. If your lease is 3000 acres it will form the Watcher B and C Units. Then, as you say, it can come back later and fill in the blanks. That is often very much in the best interest of the mineral owner, sometimes not. By spending 12 million dollars to lease the acreage and drill the first well, the operator too has earned the right to hold acreage, IMO.
But for the record a cupful of oil cannot hold leases, it has to be oil in paying quantities. In spite of old wounds and misconceptions there are not a whole of lot things the oil and gas industry can get away with these days. We have rafts of people constantly looking over our shoulders, about everything. You can’t hardly take a leak off the rig floor anymore without some regulatory guy writing you up for it.
Mike
That’s good data. Cupfuls is metaphorical, of course. The musing by analysts suddenly interested in shale was that wells that needed to be horizontal and fracked would be drilled vertical and produce enough oil to hold the lease. Since the frack step is so much money, they dodge things.
Note to self: beware 4 litre jugs of liquid near oil rigs. Possible source of human urine due to inability to piss of edge of said rig because of regulations. 😉
This link to an article in Foreign Policy has to be judged as MANDATORY reading matter for followers of this blog.
http://www.foreignpolicy.com/articles/2014/12/01/can_opec_kill_the_us_oil_boom_shale_prices_saudis
There are plenty of facts contained in it as well as a lot of numbers dealing with tight oil production costs that might or might not be accurate . All I have to say about the accuracy of these numbers is that Foreign Policy is more conscientious about such numbers and alleged facts than most publications by a wide margin in my opinion.
I don’t have time to go thru it and comment in detail right now but it should stimulate a good discussion.
Went thru it. They quote Yergin and Citi’s number. They did not analysis of their own, not that we would expect them to.
No disrespect, OFM, but that article seems inconsistent with much that I read here, and believe.
Of course it is inconsistent with a lot of what you see here. BUT it is perfectly obvious that a lot of what we have seen here for the last few years has been , ahem, somewhat WIDE of the mark, including a whole lot that I have posted myself.
Yergin and Citi may be all wrong in the long run but they have indisputably been right quite often in the short run and they wouldn’t be the giants they are except for the fact that countless people have taken their advice and profited by doing so- again at least in the short to medium term.
What is it specifically that bothers you other than the precise numbers given?
Not really a bother. It’s just that the prestige of the publication is rendered irrelevant by quoting analysis not their own. Fact checking gets constrained to verifying that the people quoted did in fact quote that, not the quote itself.
CNBC satellite radio. They have a reporter they shipped to NoDak to ask delicate questions, the answers to which of course they will airbrush. He had the CEO of something called Breitling Energy, which appears to be a public company priced $0.36/share.
Went sort of like this.
“Well, so there is much talk of the price at which shale production breaks even. Can you enlighten our listeners?”
“Oh, we think mostly of the long term. Price goes up and down and up.”
“But can you give us any numbers?”
“We produce oil at 60 . . . 65 . . . 70 . . . 75 dollars. We were producing at over $100 just a few months ago.”
[So he doesn’t even know his own breakeven to within $15?]
Back at the studio a question was posed to the reporter on the ground . . . “what of the other support industries, like restaurants and hotels and real estate, too? What’s happening with that?”
“Great question. I attended a big meeting just last night of the local business owners. The local government people were asking them about business, specifically . . . “are you firing people or hiring people.””
“The answer seemed to be “I have not fired anyone today or in the past week. I did not fill some positions that opened from attrition, but no, I have laid no one off in the past week.” And when asked if there are plans to the reply was “we’re watching the price of oil like everyone else.”
[From all this I got . . . 1) They had a big meeting last night to talk about it, on a Sunday night. 2) Hiring wasn’t mentioned 3) Breitling Energy is not impressive.
Here’s CNBC video of that big meeting:
http://video.cnbc.com/gallery/?video=3000335393
And a couple other videos discussing the current situation in the Bakken:
http://video.cnbc.com/gallery/?video=3000335346
http://video.cnbc.com/gallery/?video=3000335375
So there you go, apparently nobody in the Bakken is concerned about the fall in oil prices.
Ya, oil could drop to $1 / barrel and those folks would still be happy.
http://www.zerohedge.com/news/2014-12-01/cme-hikes-crude-oil-margins-second-time-week
Shouldn’t this put more downward pressure on the oil market, like piling on to the trend? And this is being orchestrated by the money people in the US. Perhaps I am missing something, like a brain, maybe?
Increasing margin reqmts is done to lessen volatility, in either direction.
The guys at Foreign Policy are seriously good writers and understand nuance and the fact that an individual , a company , or a country often has a number of problems to deal with silmantaneously and that an action that solves one problem may well make another worse. Comic book USA CNN FOX NPR TEA PARTY hacks they are not.
ONE point they make is that it takes a while for an organization such as OPEC to reach a consensus decision. Anybody who has followed peak oil news over the last decade or two understands that all the other countries have expected Saudi Arabia to do just about all the heavy lifting when it comes to supporting prices by cutting production. The little fellas want a free ride at BIG brothers expense when it comes to cutting back on sales.And everybody knows they all cheat like crazy on their quotas as sop- at least this is the accepted common wisdom and in this case I accept it myself.
So – this time maybe the Saudis have finally gotten tired of doing their share of the work and most of the other members work as well and paying the price while all the other members reap the profits.In this case the only real tool they have to use to beat the rest of the members over the head until they see some sense in terms of cooperating on production cuts is to simply refuse to cut unilaterally and let the little fellas feel the pain for a while -maybe after a few weeks or months of closed door negotiations the Saudis will go along at another general conference with a production cut- one that will be MATCHED by the smaller members.
http://online.wsj.com/articles/despite-glut-u-s-firms-arent-likely-to-slash-oil-output-1417397138
The jist of this article is that there will be not be a sudden and sharp drop off of tight oil production. The author thinks there will be a serious slowdown in investment but that it will not have a noticeable influence on production for at least a few months and that many analysts expect oil to go up again within that time frame.
Anyone else see this?
http://www.cnbc.com/id/102226257
Permits for new wells fell 15% in October.
http://blogs.wsj.com/moneybeat/2014/12/01/falling-oil-prices-could-lead-to-massive-junk-bond-defaults/
This article warns about oil industry junk bonds defaulting being a very serious possibility but only if oil stays way down for three years or so- down as in sixty five bucks for three years.
Now either everything I have read about the cost of producing tight oil and deep water oil and other marginal oil is either just way the hell off in terms of costs or else the world economy is going to be on life support for the next three years for oil prices to go and stay that low.
We need to remember that most of the oil actually being sold today is or was contracted for and is therefore most likely selling for more than the prices we see mentioned every few minutes.
I am a big fan of the wonderful wonderful market and the invincible invisible hand ( to the best of my knowledge I am the original author of this line but I haven’t checked yet to see) but not so big a fan that I think the economy can adapt to declining oil production fast enough that we can get by on sixty five dollar oil- legacy oil depletes at no less than four percent annually and I just can’t see any way new production is going to be brought online fast enough to replace the loss with prices so low.
MAYBE we could still have a slowly growing world economy with oil production flat or very slowly declining due to energy substitution and more efficient use of oil.
But expecting substitution and efficiency to make up for even a two percent decline for three years one after another appears to be so unlikely as to be more or less impossible.
I wouldn’t count on thee “Invisible Fist” haaving much intelligence or positive feedback.
Smith based Wealth on myths that never existed.
See: http://books.google.com/books/about/Debt.html?id=qGv9bAFsmdUC
I guess I forgot to mention that my idea for my little creation is to use it as the main line in the chorus of a sarcastic or parody song about free markets and the invisible hand.
I have not read the book the link is about and won’t be reading it- no time and no ambition anymore to read that many more books. But over the years I have read thousands of very serious ones at the rate of one or two and sometimes three in a week and in my estimation only a fool could possibly believe that markets don’t work – of course they seldom work perfectly but they work very well amazingly often.
And the invisible hand really does exist in the form of the baker providing the shoemakers bread not for the sake of the shoe maker but for the sake of the baker.It goes without saying that the shoemaker makes shoes for his own sake rather than that of the baker. And history has proven that the more efficient providers of bread and shoes very often win out to the benefit of everybody who needs bread and shoes – which is to say, just about everybody.
Now having said this much anybody who knows very much also knows that markets and the so called invisible hand cannot and do not provide answers to many problems and not for many CLASSES of problems.The free market and the invisible hand for instance cannot stop your upstream neighbor from poisoning your drinking water if he chooses to dump industrial wastes or sewage into the stream.
Now Ivy Leaguer or not the guy who wrote the book is a fool if he really believes the invisible hand is a myth or that markets don’t work.They obviously do. Just not all the time and just not perfectly.
You should really read the book. Graeber does not claim that markets don’t exist. He claims that the view of a society that was internally built around markets is a myth, and that historically, no such society ever existed naturally. And his view is supported by tons of anthropological and historical evidence, which economists completely ignore. Market exchange was practiced between different societies, communities, etc… but not internally, unless it was forced upon the society either from above or externally. The same goes for the emergence of money. Money did not emerge as an extension of barter trade, but as an extension of debt relationships.
Adam Smith is not known as a historian but as an economic theorist, the man who first explained the concepts of markets in a well thought out way.
He set out to explain markets and how and why they work and did so well enough that his name will be forever famous.
This other guy in my estimation is just another piss ant making noises about the work of elephants.
The academic world is full of people who write such books. It will be forgotten in a month. Hardly anybody with any knowledge of what money is or what trade is will take it seriously.
Dig out a few history books and you can read all a about markets that were thriving in Roman times. The run of humanity individuals may not have been making very many free choices but the leaders of the communities and societies existing at that time were without a doubt doing so to the extent that goods and services were available to BE CHOSEN. Wheat could travel in one direction in exchange for wine traveling in the other for instance. Or not- as the leaders of each community decreed.
Every business relationship involving money can be considered a debt relationship.
Money is simply a token that allows people to conduct trade without having to do it directly. Nobody disputes that. The possession of a dollar or any other money is in effect the possession of an iou that can be presented to ANY MEMBER of the society that issued that money and collected by transferring it from the possessor of the money to the society member who has a good or service for sale.
A society that issues money owes who ever has possession of that money who gains possession of that money and is jointly and severally liable for the debt. Anybody offering a good or service for sale in effect must pay his society’s debt by accepting the token and yielding up his good or service.
When that seller accepts the money then he becomes societies creditor and can collect the ”debt owed to him” by calling it -by claiming a good or service in exchange for the money from ANY other member of the society who has something to sell.
Explaining markets in terms of debts instead of debts in terms of markets at best is putting the cart in front of the horse. Both coevolved together.
I took you at your literal word when you spoke of myths that never existed.
Either you have misrepresented what this guy says or he is splitting hairs and discussing angels on pin heads.
I will retract my description of him as a fool but I based it on your words ”Smith based Wealth on myths that never existed.”
Markets certainly existed well before Smith’s time.
The extent to which any given society functioned on a market basis varied from hardly at all to substantially by Smith’s time. There were medieval towns where the ordinary man hardly ever possessed a coin and never wore clothing not made locally or ate anything not produced locally.
But even in such a town the lord of the local castle still managed to enjoy at least a few things from far away ranging from some spices to salt to copper or iron tools to a silk robe to ivory chess pieces or maybe a silver drinking cup.To claim that markets were myths is to deny that these things existed far from their origins.
It is certainly true that commerce was mostly still a local affair in Smith’s day especially compared to later times but people in large numbers were already specializing in certain kinds of work and exchanging the goods they produced for other goods that often came from far away and from people they never met or even heard of except in vague terms.
To say that this trade took place in the absence of markets is redefining the word so as to prove a highly questionable or suspect point.
The people who are so fond of proving there is no such thing as peak oil do the same thing when they quit talking about crude and start talking about total liquids and lumping in stuff that used to be known by other names.
Humpty Dumpty said it all when he said a word meant what HE said it meant. Nothing more . Nothing less.
The ”when” of markets has hardly anything at all to do with the ”wherefores” of markets which is basically and mostly what Smith concerned himself with.
He happened to live and work just at the right time to describe the nature of markets as they grew ever more sophisticated and were growing fast.
If he had not done so somebody else would have done so fairly soon thereafter.In that case somebody else would be famous.
The lack of an edit function is unfortunate.
”When a SOCIETY that issues money OWES ” should read” A society that issues money owes who ever has possession of that money”..
I should start composing as a separate document someplace else and copy and paste after taking a break … Revising on the fly leads to too many errors.
Fixed it but it still does not make a lot of sense. Societies do not issue money, governments do. And a government issues money for their own benefit, not to some other person or organization.
As I said, you should really read the book before arguing about it. The Romans and other examples are irrelevant in this case, as Graeber is talking about the natural (pre-state) societies. Economists assume that those societies functioned internally as markets, as per your example with the baker and shoemaker. That is a myth and a fantasy, as there never existed such society. Markets and money did not emerge naturally, they were forced upon the people by governments. Societies did not function on barter, barter emerged later as temporary replacement for money.
Markets and money did not emerge naturally, they were forced upon the people by governments.
Strummer, I think you are just deciding for yourself how primitive societies operated. Markets had to exist long before organized governments did. A farmer setting up a fruit stand is a market. To assume that a government had to order the farmer to set up a fruit stand is just silly.
Societies did not function on barter, barter emerged later as temporary replacement for money.
Now you are contradicting yourself. There had to be a time before money. And there had to be trade before money. And the only way to trade without money is to barter.
Read the book. Graeber is considered to be the most prominent anthropologist of the current generation. There are tons of evidence and examples on how pre-state societies operated, and none of them internally operated as a “farmer setting up a fruit stand”. They operated on various forms of redistribution and sophisticated social networks of debt.
Trade was only used as a means of exchange with foreigners and enemies, but not as a way to run the society internally, as economists assume.
Hi Ron thanks and you re right it is still a garbled mess but no matter.
The most prominent economists of this generation believe in eternal growth. The most prominent biologists believe we are in overshoot.
Over the years I have believed many things that I learned from prominent scientists that turned out to be flat out wrong.
Paul Erlich’s The Population Bomb impressed me no end and I was sure most of us -other than us yankees -would be dead of starvation by now at one time.
(Incidentally I met him in person once when he was invited to my school as a speaker. Nice guy super smart . Willing to talk to undergraduates as long as they liked after finishing his talks.I was one of the last ones out of the conference room.)
MY ag professors thought he was full of bullshit. My biology professors had a high opinion of him. The economics professors thought he was a nut case.
In the end every body has been wrong so far depending on how you define right and wrong. Change the definitions and every body has been proven right.
|We don’t yet know who will be proven right in the end.
But my guess is that in the end Erlich is going to get the last laugh along with the Good Reverent Malthus.
Specialists are apt to make fools out of themselves for a lot of reasons, one of the biggest being in love with the sound of their own names and their own pet theories.
”They operated on various forms of redistribution and sophisticated social networks of debt.”
In other words folks in power collected taxes in kind and paid their homeboys in kind and the baker got his shoes and the shoemaker got his bread without any money as such changing hands. If the village or city was of significant size neither would have necessarily recognized the other.
THIS is nothing more than trade carried out under the organizational thumb of the local alpha authority figure.
It is true that under these circumstances the baker and the shoemaker would not have traded many loaves or shoes to other citizens on a market day.But in is very reasonable to assume that they did trade SOME bread and SOME shoes for whatever else was to be had.
Now if you go back far enough then this guy probably has a good idea what was going on.
I doubt the laborers who raised the grain and brewed the beer and built the pyramids ever possessed much except the clothes on their back and maybe a bowl and a spoon and a couple of household items such as a sleeping mat and a pot to hold drinking water.
There would not have been much in the line of a working market for those guys or anybody in that society. The priests could have and probably did run everything the way the commies tried to run everything.
So there is a case to be made for saying that markets hardly existed until economies developed to the point that lots of various goods and services came into being to be MARKETED rather than simply TRADED of course.
Money in one form or another is necessary if you define markets as being above a certain size and having above a certain number of goods and services being exchanged.
Barter is simply too slow and clumsy and too inefficient.
My argument is more with and about the comments ABOUT THE BOOK here than about the book. I have not read it.
Here’s a painting of one of them:
Image caption:
“Watercolor by James G. Swan depicting the Klallam people of chief Chetzemoka at Port Townsend, with one of Chetzemoka’s wives distributing potlatch.” ~ Wikipedia
Here’s a painting of one of them:
Image caption:
“Watercolor by James G. Swan depicting the Klallam people of chief Chetzemoka at Port Townsend, with one of Chetzemoka’s wives distributing potlatch.” ~ Wikipedia
It’s a good book albeit tedious at points. Once he points why logically credit came before money it all makes sense.
The slavery stuff is also very interesting.
Any system whose focus is on other things than nature or people (vis-a-vis nature) seems flawed and doomed to fail, so from that perch, Graeber’s market thing kind of makes sense.
I caught an older comment from David Graeber just this week on Naked Capitalism in my research regarding violence and non-violence in ecosociopolitical change… There’s of course a lot of that kind of discussion going on these daze.
Hi OFM,
I think it is unlikely that oil prices will stay low for very long, even $80/b is enough to get oil companies to develop some reserves. If all development of oil reserves stopped throughout the World, oil output would decline by more than 4% per year, probably more like 7 or 8%, but oil prices would rise pretty quickly under those circumstances and oil reserves would continue to be developed in that case. Worldwide depletion rates are roughly 3% if proved plus probable reserves of crude plus condensate less extra heavy oil are about 1000 Gb (Jean Lahererre’s estimate as of year end 2013).
Laherrere’s estimate for proved plus probable reserves (C+C-XH) was 850 Gb in 2010. Since then roughly 50 Gb of C+C-XH has been produced (in 2011 and 2012) so we would have about 800 Gb at the end of 2012 if there was no reserve growth or discoveries since 2010. For 2013 output was 27 Gb depletion rate was 3.4%, if Jean Laherrere’s estimates are correct, I think his estimates are likely to be better than most.
http://seekingalpha.com/article/2720295-why-solar-is-correlated-with-crude
My view Longer … Low Oil Prices will likely reduce drilling / NG Source .. Good for Long on PV..
Bottom or not ? — Guess if you knew that – you could b wealthy.
Various pundits including I suppose some seriously well qualified financial analysts are making noises about the Saudis waging war on the US tight oil industry.
Well I have never yet thought of old RR as ray gun even though I know he was as dumb as a fence post in a lot of ways. Once upon a time he said that if somebody votes with you eighty percent of the time he is your friend. That is worth thinking about.
Now anybody running or pretending to run or trying to run as big an enterprise as major corporation or a state or a country -especially one as large and diverse and complicated as THE USA- has to make a hell of a lot of hard choices. Some of the choices that must necessarily be made are very bad news for some people, some companies, and some industries.
Now it should be perfectly obvious to anybody with a working brain that the tougher times are the more such choices have to be made and the harder some of them must be.
Sometimes ya go to the doctor and he tells you he’s gonna cut your nuts off because you have testicular cancer- or you tits because you have breast cancer if you happen to be a woman- or you leg because it is dead and going to take you with it if he doesn’t remove it.
Farmers in a desperate enough situation have always eaten their seed corn because living till spring with nothing to plant is still better than starving before winter is over.
Times are tough and it is entirely possible the people inside the Fed and the executive branch and the people who occupy other high and mighty seats of power are getting advice to the effect that the whole economic house of cards is ready to collapse unless desperate measures are employed.
Some such measures are active, some reactive. Not taking a measure is still making a decision in regard to that possible measure.
Now let us stop and think for a minute about just how precarious our economic situation really is. Maybe the powers that be really are scared the economy is fixing to have a stroke or a heart attack.
In that case if they WERE ABLE to engineer a collapse in oil prices they might go ahead and do so. IF the collapse just happens then they don’t have to make the decision to make it happen and do things to make it happen.
Now in my personal opinion neither Uncle Sam nor any other government or combination of governments or big banks or any body deliberately brought about the collapse of oil prices.I think it just happened because the industry has been more successful than expected in holding and raising overall production of total liquids and because the world wide economy has the economic flu partly as the result of high oil prices. Beyond that the economy is without any doubt becoming more energy efficient and especially more efficient in respect to conserving oil.
So- The question then – if I am right- becomes this one:
Given the overall state of the economy do we try to save our new golden haired child the tight oil industry – or sacrifice the child on the alter of overall economic stability and hoped for growth?
In my estimation the choice is an easy one for a presidential economic advisor or an economist at the fed. We throw the tight oil industry under the bus- or in alternative terms we sacrifice- or allow it to die – it in the hope that cheap oil will stimulate the overall economy enough to stabilize it and perhaps prevent a near term economic heart attack or stroke.
If this is the case then nobody in power in the top levels of the federal government or the banking industry etc really gives a damn about the tight oil industry except maybe for certain individuals from tight oil states or individuals with ties to the industry.A doctor seldom hesitates to cut off a leg to save a life-even when he knows that the loss of the leg may result in the patient dieing a year or two down the road from starvation as the result of being a one legged man unable to find work.
So MAYBE THE SAUDIS ARE OUR FRIENDS in terms of refusing to cut production even though nobody wants to admit it publicly.Somebody who spent years in Central American banana republics said the usual thing for the politicians to do was make a speech on the balcony cussing the imperialist gringos and then retreat inside the palace and give thanks on their knees for the arrival of the Marines.
Big power politics can be far more subtle than most people think.
I AM NOT contradicting my self posting these various scenarios. I am simply trying to get across the point that the motives and the actions of industries and governments are not always as easily understood as the mainstream media would have us believe.
I don’t know what I believe myself in a lot of cases. In other cases I have firm opinions and beliefs.
In my estimation the choice is an easy one for a presidential economic advisor or an economist at the fed. We throw the tight oil industry under the bus- or in alternative terms we sacrifice- or allow it to die – it in the hope that cheap oil will stimulate the overall economy enough to stabilize it and perhaps prevent a near term economic heart attack or stroke.
And wouldn’t low oil prices also stick it to Koch Industries and its involvement in tar sands?
The Koch brothers will suffer- if I am right about the federal government just standing back and allowing the tight oil industry to live or die on its own- to the extent that they have invested in tight oil.
I don”t think the tar sands industry is at risk. It can apparently easily weather a slowdown and low prices for a year or two because the companies in tar sands oil are bigger and better financed and have much brighter long term futures according to the conventional wisdom. They are not going to run short of in the ground proven assets for half a century at least. Maybe longer.
I am merely speculating about these things. I don’t have any friends at the Fed or Gold in Sacks or in the White House. 😉
OTOH Warren B and Bill G have big chunks of Suncor.
Russia maneuvers.
Gist: The EU has stopped the South Stream pipeline that would have traversed the Black Sea, entered Bulgaria and headed north to Austria and Hungary and others and pretty much ensure gas there would be forever cheaper than any US LNG export option.
Russia’s Plan B, they are going to extend a bit south from the Black Sea and instead traverse Turkey, who apparently have agreed and are not part of the EU and thus can’t be ordered to stop. The pipeline will exit Turkey and enter Greece and then disperse northward.
Greece, desperate for money that isn’t in the form of a loan and somewhat hating on all things EU, will be essentially impossible to pressure. Turkey is not a member of the EU and is thus immune to pressure.
The result, Greece, already looking for a way to default on EU/ECB/IMF loans, will suddenly have a way to do it and a new pal who actually has real assets that people need. Turkey doesn’t care anymore — Germany having vetoed EU entry repeatedly and they’ll collect a transit fee.
Ukraine loses their transit fee and ditto Bulgaria, becoming expensive wards of the EU state.
I guess this means Russia is isolated still.
Yup. It looks like secure energy access (mainly gas, but oil too) was the main reason why they could not default 3 years ago. Basically default was not worth it, so they engaged in this extend and pretend game. In one year time they will have little carrot (gas hub) dangling just on their border. It will be tempting.
Relative to global warming:
Research confirms how global warming links to carbon emissions
http://www.sciencedaily.com/releases/2014/12/141201113036.htm
Research has identified, for the first time, how global warming is related to the amount of carbon emitted. A team of researchers has derived the first theoretical equation to demonstrate that global warming is a direct result of the build-up of carbon emissions since the late 1800s when human-made carbon emissions began. The results are in accord with previous data from climate models.
Two hundred years from now, earth will be a giant desert with a few hundred million humans living at the north and south pole area mostly under ground. We could have stop it from happening.
Once that bolder get rolling down hill. It’s not going to stop until it gets to the bottom.
Now let’s not get carried away with this desert thingy. 😉
There will be PLENTY of rain.. Probably more than anytime in a gazillion years.
But most of it may not fall where it has typically fallen in recent times and when it does it will often come down a months worth in a day.
We gonna get STEAMED rather than baked as often as not.
And it will probably be quite pleasant up at the North Pole temperature wise with sunbathing weather all summer and light sweater weather in the winter.
But that full time gas mask sure is gonna suck big time..
But wearing a gas mask continuously is gonna suck big time.
Gas mask?
Huh?
Ya gotta never know- but if things could at least theoretically get bad enough that the only way for humans to make it long term might be to wear a gas mask.
I was just seeing Cookies underground life style and raising with the gas mask. 😉
I doubt there will be any people left at all if the air gets dirty enough and stays dirty enough that a mask is needed continuously .
But it could get dirty enough that masks might be needed for long periods in some places – such as near abandoned cities smoldering for decades as all the toxic materials slowly get incinerated in partly smothered fires in collapsing buildings.
Personally my best guess is that there will be a huge die off of humanity before we muck up the environment so badly that our future offspring can’t continue to live in most parts of the worlds except some desert areas and maybe in the tropics which may simply be too hot.
My future nieces and nephews may be growing citrus in Virginia in two hundred years but it is not likely to get hot enough to grow citrus in Minnesota. It may be so hot in Florida that people there grow stuff only found in the hottest parts of the Amazon now and only come out at night.Maybe even too hot for staying in Florida at all year around.
The truth is that nobody knows how hot it will get for a lot of reasons.
Oh I see now.
In my view, it’s definitely the case that no one knows what will happen. The tireless march of time will tell the true tale and pretty much nothing else will tell it as well. We’ll see. In the meantime, we abide.
Did Peak Oil Arrive in 2014?
It’s certainly a possibility, and will depend on what’s happening with the big three producers Russia, Saudi Arabia, and the US. If two out of these three peaked in 2014, then it’s probably also a World peak.
Russia looks like a strong candidate for a 2014 peak — it has more or less admitted this. Saudi has no new giant fields to compensate for natural decline, so it may also have peaked in 2014. The US is the wild card — if prices stay at $60-70/barrel in 2015 then it may also have peaked, although I think prices will go back up toward $100 unless China goes into a recession.
Frugal, I agree but with one caveat, Iraq. Problem is, we don’t know how much oil Iraq really has or if it will ever reach or even get close to its potential production: Iraq is an unknown. You may think the US went there to introduce democracy or whatever (maybe they did). But they may have gone there because somebody had credible information about reserves that were too important to ignore. One version of this story follows is:
HOW MUCH OIL DOES IRAQ HAVE?
http://www.brookings.edu/research/papers/2003/05/12globalenvironment-luft
The discrepancies between the United States’ two chief government agencies dealing with energy assessments are so sharp that they present entirely contradictory images of Iraq’s oil potential. If the DOE data is right, then Iraq has the world’s second largest proven reserves. On the other hand, if the USGS figures are right (and they are also endorsed by the 2002 Energy Outlook of the Paris-based International Energy Agency, whose projections are recognized as authoritative throughout the energy world), then Russia would be second, with roughly twice the reserves of Iraq.
Iraq’s oil reserves are about 1/3 of what they claim, just like the other Middle East OPEC countries.
Doug, I thought almost everyone was aware of the fact that those huge OPEC proven reserves were fictional. The idea that some countries have a reserves to production ratio of 100 to 200 is insane. Every country in the world is producing every barrel they possibly can. Occasionally OPEC does cut production but they are not doing that right now.
Iraq, because of mismanagement and war, could produce more oil but not that much more. They could possibly produce as much as 4 million barrels per day if they got their act together. But they will never, in my opinion, produce much more than that. You will never see them produce 5 million barrels per day.
As far as peak oil is concerned, Iraq is not a wild card. They will not reach 4 mbd before 2020.
OK, then Peak Oil Arrived in 2014. Because with the possible (remote) exception of Iraq, there is no place left to rescue the fact of depletion acceleration.
No, I did not say that. There are wild cards, it is just that Iraq is not one of them. Iran however is a wild card. If sanctions are lifted they could produce perhaps one million barrels per day more. But it would take them a while to get back to that point and there is not much of a chance that sanctions will be lifted within the next few years.
But even if Iranian sanctions were lifted that would only delay the peak by a year or so. Regardless of what happens I am sticking to my prediction of peak in 2014 or 2015. There is at least a 50 to 50 chance the peak will be this year.
Ron,
I believe you are forgetting that one trillion barrels of Oil Shale Resources in the USA west. Once we tap into that PHAT SUPPLY, I would imagine PEAK OIL will be over for GOOD.
steve
“No, I did not say that. ” I never said you said that, I said that. I said that because I’ve never seen evidence of a credible resource(s) that will counteract accelerating decline rates – with the possible, maybe I should have said conceivable, possibility of Iraq.
Did Peak Oil Arrive in 2014?
“There is at least a 50 to 50 chance the peak will be this year.”
Not this time my friend. It took 6 years of basically $100 oil for supply to catch up to demand. This dip in price is going to look small compared to 2008-09. $65 oil will be like starter fluid on the economy and by the summer of 2015 $3 gasoline will be a small memory in a dying brain cell.
Ron you have done a great job with this site. Thank you
Got my doubts on Iranian sanction effectiveness. US quotes of Iran output would seem suspect and likely supportive of policy.
A big dodge has been condensate. Condensate to China is ramping up sharply, and who is to say who defined it?
Besides which, in an overall perspective, the Administration is somewhat desperate to show that “sanctions work” and Iran didn’t look all that desperate in refusing to finish the “deal” and laughed while agreeing to a 7 month extension of negotiations.
They just don’t look stressed to me.
Got my doubts on Iranian sanction effectiveness. US quotes of Iran output would seem suspect and likely supportive of policy.
Really now? You are saying that you believe the EIA is fudging the Iran production numbers just to show that sanctions are working? Well what about the OPEC MOMR? Is OPEC fudging their numbers in a conspiracy with the US just to show that sanctions are working?
The below chart shows OPEC numbers, not EIA numbers. The EIA has Iran at about half a million barrels per day higher but they are counting condensate and Iran has a lot of condensate, about half a million barrels per day of condensate.
I don’t mean to be a smart ass Watcher, but I just don’t believe the US Department of Energy is fudging their numbers just to please the Department of State. In fact I don’t believe the numbers are being fudged to please anyone.
I can believe a lot of countries fudge their numbers for political reasons. Venezuela does it and Iran used to report about one million barrels per day more than the “secondary sources” at the OPEC MOMR. But lately their numbers are only about a quarter of a million barrels per day higher than the MOMR. And I think Russia may be doing it lately. They are reporting about 400 thousand barrels per day more than the EIA or JODI. And that number is widening. But I don’t put the EIA in the same catagory as these guys. I think we are just better than that.
The attempted measure seems to be to sum customs reports from recipient countries. Bloomberg noted the condensate issue and there were quotes of 28% Iranian overall export increases in 2014 vs 2013 (which doesn’t show on that chart, btw).
They didn’t do the deal. They haven’t been brought to their knees. They have export channels northward on the Caspian. And they can define crude to be condensate.
If you really want to see some weird stuff, a recent deal with China to develop a western Iran oil field and a natgas field has clauses in it that say things like “Chinese military presence in those regions will not require Iranian approval, and China will be able to restrict movement of Iranian nationals to and from those regions.”
China has no incentive to inconvenience themselves for the sanctions, though they do have incentive to negotiate waivers, which they did.
Watcher,
US condensate has become more expensive than condensate from Qatar/Saudi Arabia/UAE, according to an article yesterday at DownstreamToday. Those ME condensates are selling at discount (one reason), and there has been a jump in transport cost for the US because of heavy demand for ships in the Indian Ocean (second reason).
Not expected to be a permanent situation but no more US condensate is being bought right now. (The sources of information are in Singapore; we don’t hear all that much about Singapore but it’s setting up to be the main center for oil and related trade between E and SE Asia, on the one hand, and the ME on the other.)
Singapore makes money from geography, just like Panana. Also my fave city in the world. Only place I know whose official defense policy is 100% attack.
My least favorite.
More of a corporation than a country.
And the only country of its size without a Nobel Prize.
Sim Lim Square.
In the spring of 2001 the Vice President invited the CEO’s of the oil industry over for a little chat as world demand was catching up with supply. Nobody was interested in drilling up tight shale as long as $10 oil was sitting in Iraq.
We all know what happened next.
Hi Doug,
Based on that article 100 to 110 Gb is a reasonable estimate for Iraq’s eventual 2P reserves. In 2002 there were 78 Gb of proved reserves, typically proved plus probable is about 33% higher than proved reserves which would bring 2P reserves to 103 Gb, then there is likely to be 10% more oil in reserve growth and new discoveries, which would bring the total to 113 Gb. Since 2002 about 9 Gb of oil has been produced by Iraq so 2P reserves would be 94 Gb, only 1 Gb was produced by Iraq in 2013 so the depletion rate would be very low, about 1%, if reserves are only 70 Gb, depletion rates are still very low in Iraq at 1.4%. Let’s say that Iraq actually has these reserves and eventually gets its act together, at a 3% depletion rate, it could produce 5 million barrels per day if reserves were 65 Gb.
I agree with Ron’s assessment that this is unlikely in the next 5 years or so, but if it ever happens it could help on the downslope after the peak.
http://www.marketwatch.com/story/why-crude-oil-will-average-80-a-barrel-in-2015-2014-12-01
The reason for the oil price drop is because the oil produced from the Bakken is higher than expected, nobody even thought it would be as much as it is now.
Pay no attention to the water produced, it is just water and can be dumped into the river. /sarc
Just the oil, it is over 10,000 bpd for these four wells.
#27860 – KODIAK OIL & GAS (USA) INC., P WOOD 154-98-16-23-14-1H3, SESE 23-154N-98W, WILLIAMS CO., 2351 BOPD, 3198 BWPD – BAKKEN
#27861 – KODIAK OIL & GAS (USA) INC., P WOOD 154-98-16-23-15-1H, SESE 23-154N-98W, WILLIAMS CO., 1946 BOPD, 3737 BWPD – BAKKEN
#27862 – KODIAK OIL & GAS (USA) INC., P WOOD 154-98-16-23-14-1H3A, SESE 23-154N-98W, WILLIAMS CO., 2025 BOPD, 3225 BWPD – BAKKEN
#27863 – KODIAK OIL & GAS (USA) INC., P WOOD 154-98-16-23-14-2H3, SESE 23-154N-98W, WILLIAMS CO., 2080 BOPD, 2981 BWPD – BAKKEN
https://www.dmr.nd.gov/oilgas/daily/2014/dr120114.pdf
oops, can’t add, it is about 8300 bpd.
You are aware, of course, that the first 24 hours of production does not represent anything but the first 24 hours.
The Bakken always gets the credit. However, if you look at the rise of alternatives, and fuel efficiency gains, the resulting reduction in oil demand is greater than the Bakken’s production increases.
” However, if you look at the rise of alternatives, and fuel efficiency gains, the resulting reduction in oil demand is greater than the Bakken’s production increases.”
I have not seen specific figures gathered in any one spot to prove this observation but I am willing to believe it is true nevertheless.
So- In addition to increased efficiency and more alternatives we also have to consider that the world economy is in pretty sorry shape.
Between these three factors I am not surprised that oil prices are WAY DOWN.
Every body except the Saudis and a couple of smaller players ( the UAR, Norway maybe etc ) who has oil to sell is in desperate need of the cash. IF the end user just doesn’t want it because he can’t afford it the price crashes in such a situation. Farmers find themselves in this situation quite often. If we have a big crop we are apt to collect less gross revenue than if we have a small crop even though the expenses associated with a large crop are higher.
Conversely when a crop is short the price can go thru the roof if you are producing the right stuff.
The consumer can eat chicken or tofu instead of beef but he really wants his beef and will pay almost any price for it so long as he has the money.
There are people who love their apples too but unfortunately for me there are many more and better liked substitutes for apples than there are for beef. This keeps the price of apples from going stratospheric even if there is only a very small crop.
How do these numbers compare with the catastrophic crash of KOG of more than 60%? Is punishing success the new normal?
Harold Hamm seems to be changing his tune:
Billionaire Shale Pioneer Sees Drilling Slowdown on Oil Price Drop
Billionaire wildcatter Harold Hamm, a founding father of the U.S. shale boom whose personal fortune has fallen by more than half in the past three months, said U.S. drilling will slow as producers cut back amid falling oil prices.
Declining activity from Texas to North Dakota won’t be as harmful to the industry as some have feared, the chairman and chief executive officer of Continental Resources Inc. said. OPEC’s refusal to curb output last week bodes well for U.S. producers that can outlast countries in the cartel, which depend on higher oil prices.
“Will this industry slow down? Certainly,” Hamm said yesterday in a telephone interview. “Nobody’s going to go out there and drill areas, exploration areas and other areas, at a loss. They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.”
Bankruptcy will do that.
CHINA REAPS HARVEST FROM RUSSIA SANCTIONS
http://www.atimes.com/atimes/China_Business/CBIZ-01-261114.html
“The signing of energy agreements between China and Russia is a win-win situation for both countries,” said Zhou Dadi, vice director of the China Energy Research Society…”
“On Monday, Russian Finance Minister Anton Siluanov acknowledged the impact that sanctions have had on Moscow so far. We’re losing around US$40 billion a year because of geopolitical sanctions, and about $90-100 billion from oil prices falling about 30%”
It’s not a loss of $100 B. It’s $100B that wasn’t earned (aka bled from its enemies). And btw this makes it doubly odd that there is a “hope” for oil prices to rise and save shale. That would help Russia bleed its enemies faster.
Interesting tidbit from ZH.
Something like this:
Regarding the new narrative that $40 off of the price of oil will stimulate consumer spending. Well, gasoline is consumer spending, too. There’s no new money earned or printed. One category of spending moves to another. At most you see a reduction of imports money sent out of the country, but given that oil imports are down, even this benefit is muted.
Besides which, why did we not hear about the drain on consumer spending when oil was $105?
Hi Watcher,
Plenty of people have talked about high oil prices causing economic problems, you haven’t been paying attention.
http://econbrowser.com/archives/2014/11/lower-oil-prices-and-the-u-s-economy
Nevertheless, there should be no question that at this point this is a favorable development on-balance for the U.S. economy. We’re still importing 5 million more barrels each day of petroleum and products than we are exporting. Importing fewer barrels, and paying less for the barrels we do import, is a good thing.
The following blog post from 2011 is also interesting, Hamilton’s analysis suggests the economy reacts differently to increases in oil prices than it does to a fall in oil prices and that it is primarily fuel prices reaching new highs that is of greater importance.
This does not make sense to me, but perhaps I am not understanding him correctly.
Unfortunately, there is a tendency for opinions on these matters to be at least as numerous as the number of economists in the room.
The link to the 2011 Econobrowser post is below
http://econbrowser.com/archives/2011/08/economic_conseq_2
econbrowser is not a CNBC product. The point is CNBC didn’t talk about $105 bleeding consumer spending. CNBC has rather better Nielsen ratings than econbrowser.
Watcher,
Of course CNBC ratings are higher than the Econbrowser… but that doesn’t say much for the WHORES at the top financial network. CNBC has a very interesting COUNTER TREND to the Dow Jones Index.
The Higher the DOW JONES gets pumped by the FED and et al, the lower CNBC’s ratings go…LOL.
CNBC Viewership Plunges To 21 Year Lows
http://www.zerohedge.com/news/2014-09-05/cnbc-viewership-plunges-21-year-lows
Also, the Ukrainian citizens now want to know what happened to their OFFICIAL GOLD RESERVES. I guess no one told them the Blackrock MERCS confiscated and flew out the gold reserves months ago during the COUP d’ taut…LOL.
Fer Christ sakes, the amount of corruption in the Western Financial system is off the charts I am amazed Americans haven’t woke up yet…. but they will. When the PAPER House of Cards comes crashing down, we are going to see some serious FRUSTRATION come out in spades.
steve
Worth noting oil is down over a buck today to the $67.xx range (threatening 66.xx this moment).
Or rather, worth nothing the USD has been elevated strongly today by the Euro, Yen and GBP.
http://headlines.ransquawk.com/headlines/us-crude-oil-futures-settle-at-usd-66-88-bbl-down-usd-2-12-3-07-brent-crude-futures-settle-at-usd-70-54-down-usd-2-00-2-76-02-12-2014
$66.88 at the “close”. Futures resume just minutes later.
Second favorite weatherman ? Need to export some LNG and freeze some Yankees.. or not.
More news on global warming. A lot has been made about the increase in sea ice in Antarctica over the past few years. I would be interested to know if those folks who point to the increase in Antarctic sea ice as evidence against global warming understand that freshwater freezes more easily than salt water and how that fact might correlate with an increased glacier melt rate.
West Antarctic melt rate has tripled in last decade
http://www.sciencedaily.com/releases/2014/12/141202183313.htm
The glaciers in the Amundsen Sea Embayment in West Antarctica are hemorrhaging ice faster than any other part of Antarctica and are the most significant Antarctic contributors to sea level rise. This study is the first to evaluate and reconcile observations from four different measurement techniques to produce an authoritative estimate of the amount and the rate of loss over the last two decades.
“The mass loss of these glaciers is increasing at an amazing rate,” said scientist Isabella Velicogna, jointly of the UC Irvine and NASA’s Jet Propulsion Laboratory. Velicogna is a coauthor of a paper on the results, which has been accepted for Dec. 5 publication in the journal Geophysical Research Letters.
“Sea levels have been rising for 12000 years with a recent jump since the end of the mini ice age in the 1800’s. The rate of sea level increase during the past 20-30 years is the same as during 1930-1950. The hysteria surrounding all this junk science around so-called man made climate change is just stupid. It’s all about protecting the scientists whose livelihood, a.k.a. money, is tied up into being able to take the generous grant money which comes from us, the Taxpayers. If people would actually thunk this through they would realize the models these scientists worship aren’t worth Diddly squat! Get back to me when the experts can actually do something worthwhile, like, you know, predict the all time record setting polar vortex and snow falls of last winter or all the record setting ice growth being created in Antarctica in the last few years. Let’s just face up to reality, believing that the human race can have any sort of impact whatsoever on the weather is just supreme arrogance, not to mention stupidity.”138.23.161.230
-m “Sea levels have been rising for 12000 years with a recent jump since the end of the mini ice age in the 1800’s. The rate of sea level increase during the past 20-30 years is the same as during 1930-1950. The hysteria surrounding all this junk science around so-called man made climate change is just stupid. It’s all about protecting the scientists whose livelihood, a.k.a. money, is tied up into being able to take the generous grant money which comes from us, the Taxpayers. If people would actually thunk this through they would realize the models these scientists worship aren’t worth Diddly squat! Get back to me when the experts can actually do something worthwhile, like, you know, predict the all time record setting polar vortex and snow falls of last winter or all the record setting ice growth being created in Antarctica in the last few years. Let’s just face up to reality, believing that the human race can have any sort of impact whatsoever on the weather is just supreme arrogance, not to mention stupidity.”138.23.161.230<– Copy Paste Submit My Comments
,
Tide gauge readings, and, recently, satellite measurements show that over the past century, the mean sea level has risen by 4 to 8 inches. The annual rate of rise over the past 20 years has been 0.13 inches a year, roughly twice the average rate of the preceding 80 years.
Hi Doug,
NOAA has done some very good work on this recently. As an example, this article on ‘nuisance flooding’ is very interesting. One can get a gist of the article by just scrolling down to the the table entitled Top ten U.S. areas with an increase nuisance flooding*
http://www.noaanews.noaa.gov/stories2014/20140728_nuisanceflooding.html
It is just so discouraging to me that some people can so willfully ignore evidence that is so palpably powerful.
Best,
Tom
Clifford and Richard, amazingly, identically stated:
“predict the all time record setting polar vortex and snow falls of last winter or all the record setting ice growth being created in Antarctica in the last few years.”
I have heard this from other deniers on this site. OK, here you go:
Budikova, D. (2009), Role of Arctic sea ice in global atmospheric circulation:
A review, Global Planet. Change, 68(3), 149–163
Francis, J. A., W. Chan, D. Leathers, J. R. Miller, and D. E. Veron (2009),
Winter Northern Hemisphere weather patterns remember summer
Arctic sea ice extent, Geophys. Res. Lett., 36
Francis, J. A., and S. J. Vavrus. 2012. Evidence linking Arctic amplification to extreme weather in mid-latitudes, Geophys. Res. Lett., 39
Relative to the sea ice growth in the Antarctic I will simply quote myself.
I would be interested to know if those folks who point to the increase in Antarctic sea ice as evidence against global warming understand that freshwater freezes more easily than salt water and how that fact might correlate with an increased glacier melt rate.
You two can clearly copy and paste (from where is what I would like to know), but can you take a moment to honestly consider my point.
Best,
Tom
If there was actual evidence of global warming people would care. If the climatologists on the gov’t dole publishing in these discredited “me too” journals had any credibility, people would probably be interested. If the whole global warming worldview wasn’t being driven by socialist politicians, it would probably be taken seriously.
But tell one of these global warmists that you believe in their theories but are against taxes and wealth-distribution and see how far you get. Global warming is completely political, not science. The 18 years and counting pause in any and all warming proves that.
If it’s not global cooling its global warming. If it’s not global warming its climate change. If it’s not the start of a new ice age it’s the polar vortex. If it’s not cold outside, it’s…it’s…it’s…
Just admit you want to raise taxes and redistribute the wealth already!
Since when have the vast majority of people cared about evidence? Most just believe whatever fantasy that comforts them, just as you are.
Hi Tim,
It is really hard to respond to your post because I don’t know where your ignorance lies. Do you not understand entropy and the affect of oxidizing 80 million barrels of liquids into gas each day, or tons of solids into gas each day? Do you not understand the specific heat of water or the energy it takes for the phase transition of liquid to gas and solid to liquid? Do you not understand geology and the tens of millions of years of biomass that we have oxidized in only a few centuries? It seems quite likely that you simply do not know how science works and you certainly do not know the history of the hypotheses produced by climatologists in the 60’s and 70’s–Carl Sagan in Cosmos, I think around pages 100 – 102, gives a very nice, concise review of the state of the science as it existed in the late 70’s. I strongly recommend you read it.
Best,
Tom
If there was actual evidence of global warming people would care. If the climatologists on the gov’t dole publishing in these discredited “me too” journals had any credibility, people would probably be interested. If the whole global warming worldview wasn’t being driven by socialist politicians, it would probably be taken seriously.
This is an unbelievably silly comment. There is evidence and there are people who care. In fact, there are so many people who care that folks like you comb the Internet to post stuff like this in order to stop the lifestyle changes you fear will come.
Because folks like the Kochs have wealth tied up in fossil fuels, they are fighting any attempts to keep it in the ground.
If no one cares about global warming, then you have nothing to fear, right? Sit back and enjoy driving your car.
Seems like the global warming deniers sit by their computers and whenever they see anything about global warming anywhere on the Internet, they jump to comment.
They don’t participate in discussions otherwise, but they don’t hesitate to post some sort of anti-science, anti-global warming comment in any forum.
It must be time consuming to be trying to broadcast the minority viewpoint in every possible place they can. Are these people being paid by the Kochs? It’s like a full-time job for them.
Wow yea that is quite remarkable. They even seem to have ready made posts to quickly throw out there at a moments notice.
Given that there are going to be more global warming articles with each new record temperature, with each new climate incident, with each new study, and with each new global warming conference, the anti-global warming trolls are going to be very, very busy. I’ll bet even more of them will have to be hired. Or maybe the Kochs are automating the troll comments so that key words trigger canned comments.
Sometimes the truth is so simple and so obvious it is very, very hard for people used to dealing in complicated facts to accept that the truth is so banal, so COMMON .
Here is an extraordinarily simple but diamond hard fact that you can take to the bank.
Joe and Suzy Sixpack and their kids and their friends and relatives know so little about the sciences that it is utterly impossible for the average person who has a sound education to comprehend the width and depth of their ignorance.
The only people who do have some education who generally understand this situation are those such as myself. I spent some time up front in a class room in the vocational wing of a high school and I live in the darkest heart of the Bible Belt among people who learned next to nothing in school and who have learned nothing at all since leaving school.
If you think hard about how much an illiterate witch doctor with his masks and rattles knows about chemotherapy – and keep in mind that a sound knowledge of chemo requires a substantial background in both chemistry and biology in order to understand medicine which you must master before you can become a chemo expert – you might just BEGIN to get the idea.
I was a teacher once and I live in and among working class people and know whereof I speak.
But this ignorance on the part of working class people is not the worst of it. Half the people who have degrees from accredited universities know only a tiny bit more.
You can get a degree from Yale in a whole bunch of majors with ONLY ONE SOCALLED SURVEY COURSE on your transcript.
Anybody who doubts me can look this up on the Yale website.
A community college trained practical nurse is almost sure to know more chemistry and biology than an accountant or lawyer. The average economist apparently knows nothing at all about geology or physics or biology.
I understand that accepting these facts is about as hard for a truly knowledgeable person used to being around other knowledgeable people as accepting the fact that the woman you love madly is cheating on you with your best lifelong friend without your having a clue.We just don’t want to believe such things.
The ten year old child of biologist or engineer who is a caring parent probably knows more science than the average man on the street.
I was thinking about how people would have dealt with global warming pre-Internet.
They would be aware of the weather in their locations. If it started to get worse on a regular basis, they would most likely accepted it as random or an act of God. If natural disasters kept coming frequently, maybe they would have moved away in hopes of finding something better.
I can understand why global warming is a hard concept to grasp. Its full ramifications can’t be felt immediately. So I do think getting people to adjust their lifestyles for that reason is a tough sell. I think economics is easier. Having people scale back their consumption because they may never again have a good job makes a lot more sense as a selling point.
I was mainly just responding to the deniers who seem to pop up here and elsewhere to refute global warming statements. They don’t seem to care about any other discussions. They just pop in with comments on any site that makes reference to global warming. Since they aren’t likely to be following all of these discussions on a daily basis, seems like they are using Google Alert to let them know where they should be posting anti-global warming comments. And since this effort strikes me as particularly time-consuming, I do think they are acting as an anti-global warming group of some sort. Whether the Kochs are paying them directly, or whether there is some sort of indirect support (similar to how Tea Party groups were funded), I strongly believe there is an association.
There are plenty of automated blog commenting programs out there. Spammers use them extensively, but there’s no reason paid climate change deniers aren’t using them as well to spread their messages wherever they can.
Yair . . . .
Here in Australia there are a couple of passable quiz programs on National TV . . . the ignorance of basic science, geography and history shown by some of the twenty to thirty year olds is sometimes beyond belief.
Cheers.
OFM. I live in the same sorta place, but 40 north. Same sorta people, astoundingly ignorant, for the same reasons.
BUT, because they have been poor for generations, they know how to get along on just near nothing- except what they pick up from the throwaway places, which in fact, is a hell of a lot, and would be considered infinite wealth in lots of places in the world.
The two junk geniuses who help me in the workshop on my myriad of hopeless R&D things continually astound me by rooting out the very widget I was asking them to make, ready there from the junk pile.
But,yet again they hadn’t ever heard of pi, and could hardly believe that if you measure the perimeter of a pipe, and divide it by its diameter, you always get the same number, or thereabouts, REGARDLESS OF THE SIZE OF THE PIPE.
Yet another but- these guys are enormously helpful and easy to get along with. And they don’t bother to ask me why I ask them to do the nutty things that I ask.
And if perchance the widget works, they express astonishment beyond measure, and two days later remember it as their own idea.
And, fortunately, they don’t vote.
Ron,
Feel free to delete this as it is off topic. I just think it is very cool.
None of my students are old enough to remember ALH84001–if you don’t know what this is take some time to Google it. I personally feel McKay and his team found very compelling evidence for life (I give a lecture on this in my nonmajors bio classes). In an event, I am a geek for this stuff. As my moniker suggests, I am a cave biologist, but as an undergraduate I wanted to be an exobiologist. Diving in and exploring water filled caves is as close as I could realistically get to exobiology! The stable carbon isotope ratios are very interesting (many here will be familiar with this concept as it is the best evidence against abiotic oil).
Best,
Tom
Traces of Martian biological activity could be locked inside a meteorite
http://www.sciencedaily.com/releases/2014/12/141202120108.htm
These conclusions are supported by several intrinsic properties of the meteorite’s carbon, e.g. its ratio of carbon-13 to carbon-12. This was found to be significantly lower than the ratio of carbon-13 in the CO2 of Mars’s atmosphere, previously measured by the Phoenix and Curiosity rovers. Moreover, the difference between these ratios corresponds perfectly with what is observed on Earth between a piece of coal — which is biological in origin — and the carbon in the atmosphere. The researchers note that this organic matter could also have been brought to Mars when very primitive meteorites — carbonated chondrites — fell on it. However, they consider this scenario unlikely because such meteorites contain very low concentrations of organic matter.
Tom, really, a cave biologist?
Me…first in Golandrinas, out on prusik knots; what a deal that was. 50 feet of rope stretch. My club (SWT) kicked ass in Mexico; we pushed some stuff that would make grown men say no way am I doing that and cry for mama. I dropped rocks in Mexican pits at the end or ropes and all I had to say was, “shit,” and Jumar out. We ate blind slamanders in some of the stuff I was in, not kidding. They taste like chicken, sorry. Jacobs Well ? did the hour glass, pull your tank off and push thru, scared me to death, mate..
Here’s to swimming with bow leggit’ women, Tom!
Mike
Very cool stuff Mike. Sounds like you have done some incredible dives. I have done a lot of crazy stuff, but eating blind salamanders–too much for my vegetarian stomach! 😉
Best,
Tom
There was a mention of efficiency, and Jevon’s effect. Here’s an article to answer that question:
“Worldwide, governments, companies and families could be saving trillions of dollars by improving efficiency with cars that go farther on less fuel and improved appliances, light bulbs and factories, experts say.
“It’s logical, because we simply waste so much,” said Harry Verhaar, head of global and public affairs at Philips Lighting and chairman of the European Alliance to Save Energy. “Some people call energy efficiency low-hanging fruit. I would even say energy efficiency is fruit lying on the ground. We only need to bend over and pick it up.”
Some also argue that making energy cheaper by reducing demand just leads consumers to use more, a phenomenon called the rebound effect. Steven Nadel, executive director of the American Council for an Energy-Efficient Economy, said the effect was real but relatively modest, with about 20 percent of saved energy in developed countries being used as a result.
America uses half the energy per dollar of gross domestic product that it did in the 1970s and has saved more than $15 trillion since then through rising efficiency…”
http://www.nytimes.com/2014/12/01/business/energy-environment/energy-efficiency-may-be-the-key-to-saving-trillions.html?src=recg&mabReward=RI%3A6&module=Ribbon&version=origin®ion=Header&action=click&contentCollection=Recommended&pgtype=article
OK, so this completely ignores embodied energy in the goods that the US imports. I’ve seen similar numbers for the UK, about how our energy consumption has been steady or falling over the last few decades, but if you look at the energy embodied in trade it was actually rising up to the recession. I have no doubt that the same is true of the USA, probably to a larger extent. This changes the calculation somewhat. Your drawing your system boundaries too narrow.
Secondly, GDP is just the first derivative of wealth with respect to time. If you integrate it, as Tim Garrett at Utah has done, and compare change in wealth to power use then you get a constant.
http://www.inscc.utah.edu/~tgarrett/Economics/Physics_of_the_economy.html
I’d have to spend some time to verify Garrett’s calculations (I’d be curious how total wealth is calculated), but it doesn’t matter: even if the correlation is correct, he has the arrow of causality reversed.
As long as energy is cheap, it simply rises along with the economy. If people buy more cars then manufacturing inputs rise proportionately. Deliveries rise, and so does fuel consumption. VMT rises, etc.
But, a Prius gets you to work just as well as a Chevy Tahoe, with 20% of the fuel consumption.
Rail moves freight with 1/3 the fuel consumption of trucking.
LEDs light your home, with 20% of the electricity.
Passive-House tech can eliminate all operating energy inputs to one’s home (excepting sunlight).
Nick,
The calculation is a fairly simple one. Garrett simply estimated total wealth at a prior date in the 1970’s and then integrated GDP with respect to time over the time period to calculate wealth. The calculations are available as supplementary material to one of his papers which he links to on that site somewhere.
As far as the ‘arrow of causality’ is concerned you’re entirely wrong. Using energy to do work creates wealth, it’s basic physics. And the 2nd law of thermodynamics gives us a nice arrow of time which backs this up. Some of that wealth might allow us to leverage more energy, in a positive feedback loop, but in this case we know very well that the egg comes before the chicken.
Anyway the causality doesn’t matter so much as the nature and robustness of the relationship. And besides, it’s the most efficient users of energy who use the most energy in the first place. Maximum power principle.
And you’re entirely correct Sam. Very well said. It’s always refreshing to see physics explained clearly and succinctly as you have just done.
if you look at the energy embodied in trade it was actually rising up to the recession.
I’d be curious to see the source – I don’t think that’s correct.
US GDP has risen by 2.5x, and US manufacturing is 50% larger than it was in 1979 (steel production is about the same, and car production adjusted for domestic content is only a bit lower), while oil consumption is lower. Coal & gas has risen somewhat (IIRC about 40%), but nothing like the rise in GDP.
Nick,
Bear in mind I said the UK, not the US. I don’t know if anyone has done the numbers for the US, but I guess they’d show a similar trend. The paper is here:
http://www.diva-portal.org/smash/get/diva2:629677/FULLTEXT02
Hi Sam,
First wealth is not a great measure. A better way to measure is use World GDP and World energy use. Chart of World GDP per unit of primary energy consumed in purchasing power parity (PPP) 2005 international $ per ton of oil equivalent (TOE) of primary energy (all types from BP Statistical Review). IMF data used for GDP. Using world totals eliminates the trade problem.
Yeah, it doesn’t make any sense that a flow measure would have a causal relationship with a stock measure.
Let me clarify with an example: it doesn’t make any sense that energy consumption would correlate with the number of homes your own. Instead, it would correlate with the amount of money you spend heating and maintaining them.
And that brings us back to why efficiency matters: it’s perfectly possible to have a home that consumes no net energy at all.
Energy consumption correlates with the number of homes you built and owned! The houses are the wealth, maintaining them is a cost that generates no new wealth. That’s half of what garret’s trying to say, as we build more wealth, we also have to spend more energy just to maintain that wealth and stop it from decaying, as well as continuing to build more wealth.
Sam, you’re being led astray both because you’re trying to be too abstract, and because you’re using these concepts incorrectly.
GDP stands for gross domestic production. That includes great deal of stuff besides wealth creation. What you’re thinking of is properly called savings, or investment, and it’s a small fraction of overall GDP.
In our home example, heating lighting and other maintenance is indeed included in GDP. On the other hand, I could have many homes that were not lit and that only had minimum heat.
GDP is a flow variable it’s productive “work” done per unit of time. That’s very close to the concept of power which is also work per unit of time.
Wealth is a stock concept: the stuff you’ve accumulated. Again, the work you do to create it or maintain it is measured in GDP.
Nick,
Let’s look at what you’re saying and try to turn it into maths, because you’re very muddled.
First, GDP is a flow into wealth. Yes, I agree. How, then, does one calculate wealth? Simply by integrating GDP over time, just as garrett has done. Therefore GDP does not measure wealth, but the rate of change of wealth.
Secondly, if GDP is a flow then it MUST have units of dollars per time, since flows are defined by changing time.
Thirdly, work is measured in units of energy. Dollars are what you generate by doing work (creating wealth).
Fourthly if, as you say, GDP is not only a measure of wealth creation, then we would not expect there to be a linear relationship between the time integral of GDP and our rate of energy consumption. The data disagrees with you.
First, it’s important to realize that only a small portion of GDP flows in the wealth. Most production is consumed. Savings are perhaps 5 to 10% of GDP. So, an integral of GDP won’t tell you much.
Second, the data isn’t telling us much of anything. It is an attempt at finding a correlation between the flow rate of energy, and something else that makes no sense. If you run enough correlative exercises, you will find a lot of spurious correlations.
So your argument against the correlation is that it’s a correlation? That’s a new one.
Sure. Correlations are not good evidence – they only suggest hypotheses that might be worth investigation. Typically one wants a good underlying theory that makes the hypothesis make sense.
Let me give you an example: North American coal consumption grew for a long time and then fell the last several years. On the other hand North American wolf populations declined for a long time and then recovered in the last few years.
An analysis might find a strong inverse correlation between North American coal consumption and large mammal predators.
Would that be useful information?
Here’s one that’s closer to home. Copper, it turns out, has a very nice correlation with the economy. So much so that many investors use it as a key leading indicator of booms and busts in the business cycle. There are many other minerals and metals that have similar correlations, such as silver and gold.
But what do those correlations tell us?
Dennis
GDP is a measure of the rate of change of wealth. It has units of $/time. We do not use energy to create rate of change of wealth, we use energy to create wealth. GDP is in this sense analogous to velocity, and when one wants to calculate work done it’s important to remember that the equation is work = force x distance, not force x velocity.
It would be more meaningful to compare the GDP to our rate of change of energy consumption. I suspect this would come out as a constant.
Sam,
Energy consumed per year is also energy per unit time, GDP is income per unit time. Not all GDP is used to create wealth some of it is used to maintain existing wealth, some is consumed in a manner that creates no wealth. The notion that a simple integration of GDP will approximate wealth is flawed.
I think we are talking past each other here, wealth estimates are generally not very good.
Dennis,
You’re at cross purposes here. It’s a dimensional analysis. Energy per unit time is power. If you look at Garret’s work, he plots wealth vs power. Dollars are merely an arbitrary unit which we use to define wealth. I say again, GDP is a measure of the rate of change of wealth, not of wealth itself. As a time derivative it is independent of wealth at any given moment.
When you say “Not all GDP is used to create wealth” you’re half right, in that NO GDP is used to create wealth. Only energy consumption is used to create wealth. GDP is used to measure wealth creation. What is actually the case is that not all the power used in a year is used to create new wealth, much of it is used to maintain old wealth. But the implication from the research is that to grow the economy (create and maintain wealth) then a proportional increase in energy consumption is required.
Sam, I agree; as usual your reasoning is impeccable. May you be greeted in heaven by 77 virgins for your invaluable input.
Interesting, so energy creates wealth ? No other inputs?
That is like magic. Energy is certainly a part of GDP, an integration of GDP would not be equal to wealth, some GDP is used to maintain wealth, some is used to destroy wealth, some is used for things that are not wealth at all.
I think the idea sounds nice, but wealth as the sum of GDP is a very unusual definition of wealth, you need to realize that there is depreciation and it is quite difficult to estimate.
Dennis,
It’s s broad strokes first order approximation using thermodynamics, do there are of course nuances that it doesn’t catch.
Depreciation is one it does though, since in the model energy consumption is used both to maintain old wealth and create new. From a non equilibrium thermodynamics perspective it makes sense.
No worries Doug!! It is an important study worth being posted twice.
Best,
Tom
Wow! You got that fast Ron!
OPEC is wrong to think it can outlast U.S. on oil prices
[Excerpt from article]
The Saudis appear to be spoiling for a fight, trying to find out exactly how cheap oil must be to force surging U.S. shale-oil production to seize up like an unlubricated engine….
But there are at least three big problems with this strategy. One, North American crude isn’t as expensive to produce as it used to be. Two, there’s more than you think in the pipeline to make it even cheaper. And third, OPEC nations, including Saudi Arabia, have squandered their edge in cheap oil supplies on welfare states rulers can’t easily cut back.
In 2012, when U.S. shale burst into public consciousness, common wisdom was that it would cost at least $70 to $75 a barrel to produce. As recently as last week, saying U.S. producers could tolerate $60 oil seemed aggressive.
But data from the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 — to make a 10% return for rig owners. In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says. Another 27 rigs are around $29.
That’s part of why oil companies aren’t cutting capital spending much — and they say they can keep production rising without spending more, by getting more out of wells they have already drilled.
[End of excerpt]
OPEC is not spoiling for a fight. They are percolating along doing nothing at all different now than in June or in January. It’s astonishing how OPEC has become evil for doing exactly what it’s been doing for years.
I did hear a blurb today from a generic reporter who clearly didn’t know anything. “This is a different sort of price crisis. The parties that will be hurt by this are not the drillers. It’s the servicers. The truckers and suppliers. They will be cut back a little, but the drilling will go on.
See, almost no one outside the focus understands this stuff. If you showed them that no oil flows without the trucks, they will jaw drop.
Another item I heard today was an interview with some regional bank execs from the relevant areas. They say they loaned money to some drillers, but the loans are only 15% of their total loan portfolio and so their bank is in no danger — but then you could hear his tone of voice change as he realized he just said he would be under no pressure to ease terms on those loans, which was the question the reporter asked. In this environment that sounds like hardball and cuts the price of any attempted lease sales.
OPEC is not spoiling for a fight. They are percolating along doing nothing at all different now than in June or in January.
Right on, Watcher.
To my mind, the reaction of the US media is one of two things: 1) The usual knee-jerk reactions of this group to vilify anyone else, whether they’re doing anything or not, whether there’s evidence or not, or if the actions of the US in the circumstance are identical or worse than the proposed bad actor, or 2)Someone or some group who understands the situation is trying to transfer the blame for a volatile, unstable price structure to foreigners, rather than accept that the US is equally culpable. There is an obvious point that , in the first case, they don’t know, or in the second case, they seek to hide: the US has no control over the amount of oil they produce on a national basis, while the Saudis do. Not only are the Saudis not doing anything different between January and now, my guess is that they can’t do anything different. They are planning and budgeting for a system that produces almost 10 million barrels a day. A pretty big ship to turn. It would cost them money to cut back, and of course, there’s no guarantee that it would raise prices.
The media is saying that by not cutting back, the Saudis are using oil as a weapon. We could translate that to “The Saudis should cut back to raise oil prices.” I don’t see anyone saying ” We should limit production in the Bakken and Eagle Ford to raise prices” , or even worse, “We should negotiate proportional cuts with OPEC to raise prices.”
So my interpretation is that either through ignorance or cunning (though this is the US media we’re talking about, so my money is on ignorance), and with toxic national ideologies influencing things (No Taxes! No socialism! No government interference in the markets!) the only answer they have is “It’s those guys in the turbans! They hate us for (whatever.)”
While at the same time praising the lower gas prices.
-Lloyd
The media is saying that by not cutting back, the Saudis are using oil as a weapon. We could translate that to “The Saudis should cut back to raise oil prices.” I don’t see anyone saying ” We should limit production in the Bakken and Eagle Ford to raise prices” , or even worse, “We should negotiate proportional cuts with OPEC to raise prices.”
Great observation.
The entire purpose of OPEC is to raise prices above where they would be otherwise. Further, both OPEC and it’s members have said that they thought $100 oil was just right. So, if OPEC doesn’t defend $100, they’ve changed policies in some major way. It’s reasonable to ask how and why.
The simple answer is that OPEC has given up on controlling prices, as discussed in a detailed way by Steven Kopits on his blog (as I just posted in a new comment). Seems reasonable to me.
and they say they can keep production rising without spending more, by getting more out of wells they have already drilled.
If they say that then they are flat out lying. Bakken wells decline from the very first day of production. There is no way they can get an existing well to increase its output.
Again, I keep asking why would anybody spend 8 million dollars to drill a well, with borrowed money, and some risk for failure, be it small risk, to earn 10% rate of return…over the life of the well? I find those kinds of statements mind boggling and the implications towards wanting to buy stock in a company that can only earn those kinds of returns, staggering. This coming from MarketWatch ?!?
Part of the shale oil propaganda campaign revolves around EOR theories of existing wells by water flooding and C02 injection; with my understanding of the rock any kind of EOR is next to impossible and C02 requires a source and is horrifically expensive. Re-frac’ing, at 3 million more dollars per well, use to be the hope for the shale oil industry; we don’t hear too much to that hooey anymore because it doesn’t work, not in the EF anyway; the economics of re-frac’ing have been a disaster. So I don’t see how they are going to get more oil out of existing wells either.
Poor research and poor writing, that unfortunately Americans will believe. By the way, operators drilling wells are not “rig owners.” There are drilling rigs and there are work over rigs, both owned by 3rd parties and contracted by operators. When wells are put of rod lift those big things that go up and down are called pumping units, or pump jacks, not rigs. That rig term is over used and a peeve of mine that leads to lots of confusion with an uninformed public.
Mike
Yeah, good call. Reporters can’t possibly understand this stuff. Even the financial guys don’t understand what they’re saying.
It’s like teachers. They get certified and trained in the process of teaching for pre university levels. They are not specialists in History or English. They just learned how to teach and create lessons from textbooks. Only the hard sciences teachers are required to have some actual knowledge.
Reporters learn how to make phone calls and get quotes correct. Then if they think it’s a matter of opinion they’ll seek a counter quote to look balanced. Mostly they keep their job by filing copy by deadline requirements. Their degrees are in journalism or politics or history, not geology or even economics.
You have to read between the lines to get anything of value from them.
Why are then stock prices falling through the floor? KOG, CLR, HAL, QEP, APA, HK,DSRL, RIG…. all falling like stones. This is a veritable crash and shareholders do not think that production will be profitable. In my view, the longer the oil prices stays low, the worse the situation gets. Companies have to reign in production now and wait for higher prices.
Heinrich, even if a lot of companies are still making money after oil prices fell $40 a barrel, they are all making a lot less money. So they all went from making a shit pot full of money to making just a little money. That’s why their stock price fell.
That is not to say that all of them are making money at the current price. With the money they are paying out in junk bond interest I am sure some of them are losing money and just hope to weather the storm until prices increase. But there has been a drastic drop in profits for all of them.
Hi Ron,
It is kind of surprising that the drilling rig counts have held steady through the end of November, I would think at some point oil companies would want to wait for oil prices to go up before drilling more wells, or at least slow down the rate of drilling. Maybe someone can explain this to me. Any ideas, I agree wells already drilled will be fracked, and wells that have been started will be finished, but at some point the drilling has to slow down at these prices, maybe we will see this in December, maybe everyone thought OPEC would cut output.
I know I did. Oh well. Maybe I am also wrong about oil prices eventually rising. Definitely not placing any bets.
2014 capex was already allocated and long-term rig contracts are in place. We need a little more time to pass before rig counts are affected, although look already at Divide County. Just 4 rigs working there the last couple weeks, down from an average of 10-15 over the last couple years. American Eagle Energy (AMZG), which operates only in northwestern Divide County, recently released all its rigs. They are in serious financial trouble at this point.
We’re coming up on the time of year when the shale companies typically announce their preliminary drilling plans for the next year. Keep an eye out on the investor websites.
That is exactly what I would expect. Divide County wells produce about a quarter of what wells in the McKenzie County produce. The first to cut will be in areas where the first year’s production is 100 bpd or less.
We will see drilling in the marginal areas completely disappear by early next year.
If a company has a contract to “rent” the rig for a period of time then they will pay for it whether it drills or not. If you have to pay for it anyway then you might as well use it. I don’t believe rigs are like a rented car, you can’t just bring it back and stop paying. Rigs will go back when the contract ends.
Been playing with numbers.
Probably the way to do the breakeven thing is well by well wrt to output. At XX price a well flowing 200 bpd may be profitable (where profitable is 10% above breakeven, the reqd profit) and a well flowing 150 bpd isn’t.
This assumes all wells cost the same, which may only be true if the frack stage count is the same.
Yo, Mike, over a few square miles, what variance is there in what you pay for the lease. The royalty probably varies, yes, but I’m groping for the upfront costs here beyond the generic “$10 million to drill the well.” If in practice it’s largely the same amount, then the problem really does reduce to well output.
As the price falls, wells flowing more and more go into the red — but of course they go into the red because mostly the loan service requirement, which won’t go away even if you shut down that well.
Watcher, there is very little leasing going on in the 2 big shale plays anymore as most of it is now HBP. Three to five years ago, however, I was estimating a typical 1000 acre unit was costing 2.5 million dollars to lease and clear title on, including land and legal work. I think that was a good number then. There are considerable legal costs incurred in doing curative title work on land and preparing the division of royalty interest. Mr. Watcher may, for instance, own a 1/64th mineral interest in 1.3 acres in the 1000 acre unit and therefore own 0.0000245 royalty interest in the unit, something like that. It can get very complicated.
I take your post to question the meaning of 10% rate of return spouted in the Market Watch article. Shale oil companies like to state in corporate reports that based on EUR of a well it hopes to earn say, 40-60% internal rate of return (they used those numbers at 100 dollar oil) on initial capital expenditures. I have always taken that to mean that if the well cost 10 million dollars to acquire acreage, drill and compete the well, etc., all they expect to earn over the life of the well, based on the EUR, is say, 15 million dollars. That is net dollars to the operator, after royalty, production taxes, debt service, production costs, initial CAPEX, everything. If you take into consideration how many barrels of oil it takes to pay a 10 million dollar well out, using Dennis’ estimates for royalty, taxes and OPEX, and look at the EUR numbers they use, that internal rate of return number is about right. The ultimate, total internal rate of return a shale oil operator might (hope, is a better word) expect to earn, of course, goes down with oil prices, according to the article above, at 42 dollars it is now 10%, not 40-60%. That’s how I interpret that.
Mike
Thanks Mike, the 2.5 million per 1000 acres is the number in question. Your phrasing suggests that is largely unvarying . . . the next 1000 acres next door won’t negotiate a better or worse deal.
What I am mostly groping for is a different sort of breakeven. There are broad statements about “XX% of shale areas are profitable at $XX/barrel” and that’s not the right concept. The right concept would be what is the flow rate that is too low to make money, and yes, “make money” includes the 10% return desired. Nobody invests $10 million to breakeven
(well, hmmm, maybe I should not say that, portfolio design for older folks has ALWAYS been “have your age in bonds” meaning if you’re 70 yrs old you should have at least 70% of your assets in bonds — which in low maturities pay 0% and thus people are investing to just breakeven (because at 70 you don’t have time to recover from a stock market fall))
but back to oil . . . I looked up royalties and tax and 20ish% is a legit number to extract from revenue. Opex is likely a bit of a wild card because it gets too often quoted as $$/barrel, and it’s not. The admin people get paid even if oil doesn’t flow.
As best I can tell, at Bakken prices of ($67 WTI minus $16 discount from quality and transport — which is from the latest Director’s Cut — $51/barrel starts to go cashflow negative around 300 bpd. That includes $2.5 million/yr loan servicing reqmt.
So it’s not a matter of what areas are “profitable”. It’s a question of what flowrate (which mostly means age of well) is a cash drain.
What will kill the whole thing is when projected flow evaluated at lower prices stops being sufficient collateral for the next loan and the banks and HY funds close the spigot.
Re my doubts about quoting OpEx as $$/barrel — just came across this — it’s from the Marcellus:
“Some states such as Pennsylvania also make it difficult to drill such wells, which means operators fracking the Marcellus Shale there must pay to truck the produced water to Ohio for disposal. That can cost as much as $15 a barrel, and “sooner or later Ohio is going to get a bit panicky about that,” Bajpayee notes. In addition, it costs at least $5 million to drill each new disposal well.”
Water disposal is a significant cost, and when water cut is big, it is not related to oil production on a per barrel basis, at least not linearly.
Hi Watcher,
The breakeven price includes the 10% ROR, in the oil industry one expects to make more than a 10% ROR because it is risky. So breaking even means you are earning the 10% ROR, nobody would be in the oil business if they were only earning that 10% ROR. Though as Ron mentions when prices fall, they may be lucky to get that.
10% would have to be annual. Compound that over 10 yrs and, yes, 2.6X.
If you did it 10% total, over 10 yrs, you lose to inflation.
This is not really relevant to the primary issue, which is water.
I am getting confused reading all this confusion about rates of return on shale wells. This Market Watch article was written by a 3rd grader who’s dad must work for Shale R Us, LLC.
Hypothetically, lets say the price of oil is now 65 dollars a barrel and after royalty deductions, production and property tax deductions and production costs, including some transportation deduct, the man paying the bills, the operator, is netting 30 dollars a barrel. It costs this operator fella 8 million dollars to lease, drill and complete his well, into the tanks. If the price of oil stays constant at 65 dollars, it is going to have to produce 266,000 BO just to pay out. Not break even, pay out; you guys gotta get the oil lingo down.
If you guys want you can dick around with IP’s and first year production and decline rates, time to payout, interest on 8 million dollars and estimate annual rates of return on year 1 thru year 5; to me that is a waste of time. I understand the time of value of money and net present value, etc., but these shale guys are manufacturing these wells like tires being made in a tire factory; I am looking at the big picture, the shale well plant. Forget associated gas, by the way. Most of these better shale wells appear to make 75-80% % liquids, gas is not worth much and a lot of it gets vented.
This fella that drilled this shale well estimates the ultimate recovery (EUR) of oil from his well, based on IP’s, 6 months of plotting production, and what everybody else thinks a shale well “type” decline curve looks like, and he declares the well is going to make 432,000 BO before it dies of old age. Not BOE but BO. The well has to live 25 years to make that 432,000 BO based on his pretty hyperbolic decline curve with the long fat tails. He’s proud. He thinks that’s good stuff.
So, after payout, which took 3 years, his well is going to make another 166,000 BO over the next 22 years. If the price of oil stays at 65 dollars gross, and this man nets 30 dollars a barrel, he is going to earn $4,980,000.00 on an 8,000,000 dollar CAPEX. So he proudly makes a press release saying the internal rate of return on his well, or his pile of wells, is 62%. He does not let on that he is just hoping and that the E in EUR stands for estimated. He knows that costs are going to go up, but he ain’t talking. If this fella keeps the well until it croaks, and it makes another 166,000 BO over the next 22 years, he earns 4.5% annual rate of return on his investment.
So again, if you believe in net oil prices after expenses, and you believe in well costs being around 8M, and 432,000 BO EUR is about right (that’s a very good shale well, actually), then 60% internal rates of return shale guys talk about is a pretty good number. BTW, ask me if I would risk 8 million dollars to earn 4.5% per year ARR.
No.
So I don’t know what the Market Watch article is stating about 10% rates of return. Annually? If so 10% ARR on an 8 million CAPEX is going to take 10 years to pay back well costs. Who’s gonna do that?
Mike
“Not break even, pay out; you guys gotta get the oil lingo down.”
That can matter.
It should matter, yes. There are 6 different meanings for the word break even and until I started reading blogs about the shale oil business, I never even heard the term before. I guess in the context it was used here, it means when the well has paid back all its costs.
While we’re on the subject of being confused, ping me with the article you are going to write on why 300 BOPD is the beginning of negative cash flow in the shale oil business, please. I am excited that 12,000 shale wells are going to get shut in soon and the price of oil might start going up again.
Breakeven does have several definitions, even outside shale. You’re right about this. Your term “pay out” would be an oil field specific on this item.
Even earnings at companies have several meanings. Gross profit. Net profit. EBITA (Earnings Before Interest Taxes Amortization), EBITDA (throw in depreciation too), EPS (earnings per share, where the present trend is to buy back your own shares, decrease the denominator and pretend you’re growing because EPS improves).
Pay Out can be an entirely legitimate problem for most of us, terminology wise.
Don’t forget the time value of money.
70% of LTO production happens in the out years (year 2 and later). If you invest $10 today, and get $15M in 3 years, you’ve only made 14.4% ROI.
So, if projects cost $10, and a 50% ROI is expected, then the total $ return is going to be substantially more than $15M. How much depends on the timing of the income.
The earth has been warming for the past 13,000 years since the last ice age ended. The melt sent trillions of tons of water into the Atlantic, all fresh, newly melted ice turned to water, formed Lake Agassiz. The whole shebang. Global warming is better than an ice age. Ask anybody where they would rather be, an igloo in Nunavut or the beaches in Tahiti.
Here’s a place to go to for more information:
http://www.antarctica.ac.uk/bas_research/science_briefings/icecorebriefing.php
It will stay warm more so than not for the next 5 thousand years or so, then after that, the earth will begin to cool and then a deep freeze will take place to once again plunge the earth into another ice age. We are in an inter-glacial time period, the Wisconsin glaciers covered the northern hemisphere. It was cold for a long time. Some believe we are still in an ice age, just looks different then it once was.
The ice core samples, the seabed floor core samples, the geology, all contain the information that then tells the story and after close study, which has been done, the story can be told. The ice core samples chewed out of the ice in Antarctica date back 800,000 years. The ice core samples contain data from as late as the 1980’s. The studied core samples show an increase of CO2 beginning ca. 1900.
The 1930’s was a decade of unusually warm summertime temps in the US, could be due from Carbon emissions beginning in the early 19th century, a lag time of 100 plus years of continuing increases of CO2 into the atmosphere from the previous fixed state, the coal by the millions of tons and then oil by the millions of barrels beginning late 19th century, an effect will take place. The effect will be baked in, it will happen. The climate and the weather during decade of the Thirties might be one of those harbingers. A wild ass guess, just for the musing.
If you mine for copper, zinc, silver, gold, recycle steel, mine for rare earth elements, coal, oil, burn coal, burn oil, for power and manufacturing, the carbon emissions will be staggering. You create a feedback. Especially if you want to build an energy system consisting of 3.8 million wind turbines, the amount of resources, land and water used to do that will permanently damage every ecosystem on the earth, pole to pole. It is a disaster to happen at some time in the future, but it will happen. You will once again add to the magnification of carbon emissions created by man and add to the feedback. You will destroy the earth to save the earth.
You can’t burn oil and coal at the rate it is being burned and not have an effect on the weather, the climate will change. Another hundred years of it, there will be some changes. Might even become colder, not warmer. Might be a good idea to make some changes now.
I will digress:
The earth’s atmosphere could have been thousands of miles thick, saturated with water mist, the whole earth was tropical, at some point in time, the moisture was everywhere. Then one day all of the water absorbed into the atmosphere began to precipitate, it rained like a cow pissing on a flat rock for days on end, the earth’s atmosphere shrunk down to 50 miles thick, nearly all of the moisture turned to water, gravity did its job, and the ocean levels were 100 feet higher over night, more or less. That’s what I read once about it all somewhere in a book.
Before that, Noah was gathering gopher wood and building the Ark.
Way to go Ronald.
But to make any sense of your performances one must already know what you are talking about.
There is very little doubt we are in an interglacial period and that the glaciers will again be scouring the Canadian and upper US prairies down to bedrock a few thousand years from now- or maybe even a few hundred years from now..
But the long term is an academic question and we live in the short term. The anthropegenic climate change denialists use the basic outlines of climate history past and future to hide the truth about what is going to happen over the next few centuries.
It IS going to get hot as the hinges of hell and we have already set the planetary oven to preheat.
There is nothing to be done about it now except try to minimize the rise in average temperatures.
All the misdirection and obfuscation in the world is not going to change this fact.
Hi Mac,
It will likely be a 100,000 years before we see another ice age, unless an asteroid hits or we have a nuclear winter.
Maybe so. It has been a long time since I read up on the long term geological cycles that have characterized the last few hundred thousand or million years or so. As best I can remember the introductory textbooks said that the current interglacial period was nearing its end and that it might not last another thousand years or it might last another two or three thousand years..
These were older texts of course, written back in the dark ages when I was a long hair with a peace sign on a chain around my neck.That hair and jewelry was more camoflauge than anything else since I figured out pretty fast that the most liberated girls were into that sort of stuff.
So- IF it weren’t for us filling the atmosphere up with a huge excess of greenhouse CO2 maybe this warm period WOULD BE near the end of it’s life expectancy.
But I am way behind on some things. Long term climate is one of them.
At any rate we are agreed that the next few centuries are going to be exceedingly hot in relation to the last few thousand years.I suppose the planet will take at least three or four hundred years to cool off again after we quit burning fossil fuels. Maybe even twice that long..
Hi OFM,
My understanding is that if atmospheric CO2 had remained around 280 ppm and humans did not inject an extra 1 to 1.5 trillion tons of carbon into the atmosphere (the likely minimum level) then possibly a new ice age might begin its cycle within 1000 years. What is not commonly understood is that the natural carbon cycle removes carbon dioxide very slowly from the atmosphere (on a net basis the carbon cycles to and from the atmosphere, but the net carbon is reduced over about 100,000 years back to pre industrial levels. This analysis ignores any other possible tipping points, it is the time it will take for atmospheric CO2 to fall from 500 ppm to 280 ppm if 1200 Gt of carbon are emitted from fossil fuels, cement production and land use change by 2100, with no further net emissions by humans after that point.
If you mine for copper, zinc, silver, gold, recycle steel, mine for rare earth elements, coal, oil, …for power and manufacturing, the carbon emissions will be staggering. You create a feedback. Especially if you want to build an energy system consisting of 3.8 million wind turbines, the amount of resources, land and water used to do that will permanently damage every ecosystem on the earth
Nah. 1st, that mining can be done with low-CO2 power (much mining is electrical right now), and 2nd, that mining doesn’t use that much energy anyhow: windpower has an EROEI of roughly 50:1.
NREL says the payback of ALL energy used to make a wind turbine is paid back in full in LESS THAN 6 MONTHS. After that, it can be a breeder of more wind turbines.
Is that grid-tied, large-scale-centralized?
Where do you get this statistic? Your ‘roughly’ inclusion makes it suspect and is over twice these stats:
“In 2006, according to the Danish Wind Energy Association, the EROEI of wind energy in North America and Europe is about 20:1” ~ Wikipedia
“Wind comes in at an EROI of 18”
Your inclusions of ‘can’ (be done) and ‘much’ also makes your statements questionable.
Elaboration please.
Makes me think of how I hear that people are getting increasingly tired/frustrated, (to be charitable), of being hand-waved, lied to, and double-spoken to by politicians, for example. What do you think?
…And how much of ‘our’ economy is really just a glorified ponzi scheme for the shrinking elite.
Here are two sources:
Cutler Cleveland’s summary of the literature:
http://www.eoearth.org/article/Energy_return_on_investment_(EROI)_for_wind_energy
which showed that wind’s E-ROI was around 19. If you study his sources, you’ll see that that most of the studies are quite old. If you look at the turbines analyzed in those studies, you’ll see that they were much smaller than those in use today – look at Figure 2, and read the discussion. If you study that chart, you’ll see a very clear correlation between turbine size and E-ROI. Given the recent very large increase in turbine size, it’s perfectly clear that Vestas’ claim for a current E-ROI of around 50 is entirely credible.
and,
“The work presented examines life cycle environmental impacts of two 2.0 MW wind turbines. Manufacturing, transport, installation, maintenance, and end of life have been considered for both models and are compared using the ReCiPe 2008 impact assessment method. In addition, energy payback analysis was conducted based on the cumulative energy demand and the energy produced by the wind turbines over 20 years. Life cycle assessment revealed that environmental impacts are concentrated in the manufacturing stage, which accounts for 78% of impacts. The energy payback period for the two turbine models are found to be 5.2 and 6.4 months, respectively.”
http://www.ourenergypolicy.org/wp-content/uploads/2014/06/turbines.pdf
G, what a surprise.
“It is important to realize we have only looked at the energy for the concrete and rebar for the base of a 2.5 MMwatt turbine. Behind this device and most sun and wind capturing devices are a global system of providing energy and materials. And this support is further supported. Here is one mining truck among a worldwide fleet of trucks that also must be manufactured. It is like a thread on a knitted sweater that when you pull it thinking you will get a small piece, you end up with a whole ball of yarn…
…
The base of this 2.5 megawatt turbine in the pictures that follow (half the megawatts in the Jacobson/Delucchi study) used 45 tons of rebar and 630 cubic yards of cement. This computes in barrels of oil and in tons of CO2 for each base:
For the Concrete
478.8 Barrels of oil in 630 yards of concrete… For the Rebar…
…
…building ‘renewables’ involves intensive use of fossil fuels, the emissions from which the machines made to generate this renewable energy can never be removed by the machines… it doesn’t matter how many wind turbines are erected, the fossil energy use just keeps growing… and if we decided tomorrow to shut down all fossil fuel use (a darn good idea…), then not one more wind turbine would be erected, and not one more solar panel would be built…” ~ John Weber
“…if we look at Germany’s total energy use (including heating and transport), rather than just at electricity, energy classed as renewable accounts for just 11.5 percent. The majority, 87.8 percent, of Germany’s energy continues to come from fossil fuels and nuclear power… Coal consumption, which had been falling until 2008, has been rising again since then. Germany remains the European Union’s (EU) top coal consumer…
The picture looks even worse when one examines the mix of energy classed as renewable in Germany: Solar photovoltaic (PV) makes up 11.5 percent of renewables, wind, 16.8 percent. The bulk of it – 62 percent – comes from bioenergy, much of which is far from low carbon or sustainable. It includes biofuels, many of them made from imported soya and palm oil that are being expanded at the expense of tropical forests and peatlands and that destroy the livelihoods of small farmers, indigenous and other forest dependent peoples worldwide. It includes biogas made from 820,000 hectares of corn monocultures in Germany – a key driver for biodiversity loss in the country. And it includes wood pellets linked to forest degradation across Central Europe. On closer examination, therefore, 24,000 wind turbines and 1.4 million solar panels have scarcely made a dent in Germany’s fossil fuel burning and carbon emissions.” ~ Almuth Ernsting
Caelan,
There is an important structural issue in Germany’s renewable industry.
Solar PV production is the highest around noon, when actually not much electricity is needed. In the morning and in the evening when demand is the highest, there is not much PV electricity generated. So much of the PV electricity is exported and electricity must be generated by coal in the morning and the evening. Policy maker just realized this gap and are franticly trying to solve the production gap by expanding the high voltage grid and installing gas turbines, which takes time and is politically difficult.
Hi Heinrich,
Thanks for that bit of elaboration.
A hypothetical dystopian science fiction film occurred to me later yesterday while I was in the shower thinking about this kind of thing…
About an alien race, much like our own, on a dying planet of its own making… Via a global economic-political system based on coercion and corruption, they install vast networks of alternative energy systems in a race against time to further limited economic interests and to ‘presumably’ offset the systems that are responsible for their dire predicaments. (‘Dire’ is a word they use often, but it is in Alienspeak. The audience picks this up as the film progresses.)
This large-scale centralized vested-interest activity only makes matters worse, in part because it’s just ‘More of The Same’ (MTS/BAU) and in part due to calculations borne of inherent species/system myopia, desperation and other forms of sociopolitical/hierarchical/(status)/etc. dynamics…
In the end, there’s a slow, Kubrick-like, camera pan over a parched desolate landscape (through a special gold-duotone-filter) of slowly-decaying, unused windfarms.
Thank goodness it’s only fiction.
I imagine Werner Fassbinder, if he were still alive, would have something to say about this too, perhaps even more acutely than Kubrick.
We should crowd-source this kind of film…
Or just let it play out in realtime…
The American Oil Boom Won’t Last Long at $65 Per Barrel
U.S. production probably will decrease, even if it takes a while. At $65 a barrel, it’s unlikely the U.S. can keep up its record-setting pace of expanding oil production. U.S. oil has jumped from about 5 million barrels a day in 2008 to more than 9 million. Even before OPEC’s decision, forecasters were calling for a slowdown. Last May, for instance, the Energy Information Agency forecast that total U.S. production would peak just shy of 10 million barrels per day before 2020.
But I am more interested in the chart they posted below. The peak is actually from 2016 to 2019. Perhaps but look at what they have for US Offshore. 2 million barrels per day by 2016. Total US Offshore in September, combined GOM and Pacific, was 1.477 million barrels per day. And it is not increasing. I just don’t think they will make 2 mbd by 2016.
Somewhat relevant. Latest polls out of Japan say Abe’s LDP has a huge lead for the upcoming elections in a few weeks.
This means Kuroda at BoJ will not have a new party tell him to stop his gargantuan QE.
This points downward as the direction of the yen — and that will push the dollar up. Not bullish for oil.
What do people think of Steve Kopit’s ideas?
“This world came crashing down in the wake of 1979. Although prices were kept high through 1983, Saudi GDP was falling after 1980 due to oil production cuts. Unit prices remained high, but volumes were declining precipitously. In 1985, insult added to injury, as Saudi was hit by both dramatically reduced production and collapsing prices. By 1987, Saudi per capita GDP has fallen to $31,000, a decline of 43% in just seven years. And this did not improve until the run up in oil prices started just a decade ago. Even today, Saudi per capita GDP remains 20% below its 1980 level in constant dollar terms (in part because the Kingdom’s population has more than tripled since 1980).
For Saudi Arabia, 1979 left a lasting impression. While the Kingdom can compensate for unexpected supply outages or transient declines in demand, in the long run, markets cannot be defeated. Reducing production to maintain prices just invites reduced consumption and increased production from competitors. These forces will in turn reduce prices again, requiring yet another round of production cuts. History tells the Saudis that such a policy will end in disaster. For the Kingdom, 2014 looks much like 1979. And the lessons of 1979 dictate that, at the end of the day, Saudi Arabia is better served in the longer term by choosing a production level and sticking with it. And that’s just what the Kingdom has done. ”
http://www.prienga.com/blog/2014/11/11/understanding-saudi-oil-policy-the-lessons-of-79
Like most in the conversation, he leaves out the growth of the alternatives Biofuel, CNG, Electric, Hybrid Electric, and Hydrogen powered vehicles. And even Solar energy, and other alternatives replacing Fuel Oil.
These alternatives combined are having a much greater effect than the Bakken, and will ultimately lead to the decline of oil production.
I do suspect that Steve doesn’t pay proper attention to those alternatives, but that’s not really important to this article. When he refers to “reduced consumption”, that kind’ve includes them.
I do think that the Saudis are very aware of alternatives, but decided not to worry about them when it looked like $100 oil was here to stay. Now, of course, we can hope that was a big mistake on their part…
In the long term, alternative energy vehicles could make a sizeable dent in oil demand, but in a 5-year time-frame, it will be negligible. Total US EV/PHEV sales will set a new record this year – over 100K vehicles. Even if that were increased to 1M vehicles/year, or even 10M per year, it will take decades to replace the existing ICE vehicles in operation.
For example, the 60K Chevy Volts on the US roads today, according to GM’s website, have saved a total of 36M gallons of gasoline. That is less than 1M barrels of oil – total. Less than 1 day’s production from the Bakken. I would expect that all the EV’s, PHEV’s, CNG and Biofuel vehicles on the road combined have saved a less week’s worth of Bakken production.
In the long term, alternative energy vehicles could make a sizeable dent in oil demand, but in a 5-year time-frame, it will be negligible. Total US EV/PHEV sales will set a new record this year – over 100K vehicles. Even if that were increased to 1M vehicles/year, or even 10M per year, it will take decades to replace the existing ICE vehicles in operation.
People may still own ICE vehicles, but not drive them, or at least drive them considerably less. An existing ICE vehicle isn’t consuming fossil fuels if it isn’t driven.
As jobs disappear, as boomer retire, as people move into cities and use public transportation, and as gas increases in price enough to discourage driving, fuel consumption can go down, even when ICEs haven’t been replace by alternative energy vehicles.
Ethanol production is approaching 2 million barrels/day. Roughly twice as much as North Dakota’s oil production. What Ethanol usually gets credit for is destroying someone’s 10 year old lawnmower. Biodiesel production is about 400,00 barrels/day. CNG vehicles worldwide save about 650,000 barrels/day. And although hybrids do run on gasoline, they get roughly twice the mileage, saving around 350,000 barrels/day. The small number of EVs on the market save roughly 23,000 barrels/day. However, those numbers have been essentially doubling every year.
The key difference is between could and will.
We could dramatically reduce oil consumption and save money, clean up the environment, and make ourselves safer.
Instead, we do relatively little, and allow fossil fuel producers to continue with business as usual.
In the context of reading between the lines, this gem from ZH:
http://www.zerohedge.com/news/2014-12-03/jobs-shale-states-vs-non-shale-states#comments
“Because since December 2007, or roughly the start of the global depression, shale oil states have added 1.36 million jobs while non-shale states have lost 424,000 jobs.”
[which is somewhat re: GDP from shale]
“The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.”
[which is more than somewhat re: GDP from shale]
“Simply put, this means 9.3 million, or 93% of the 10 million jobs created since the recession/depression trough, are energy related.”
Reading between the lines . . . the case for subsidy is being built.
If you think about these enormous costs, you begin to understand why electric vehicles are cheaper.
‘Cheaper’ in what sense?
“…electric cars merely shift negative impacts from one place to another…
The electric car’s presumed cleanliness has not held up to scrutiny from broad, publicly funded studies from the National Academy of Sciences, the National Science Foundation and the Congressional Budget Office. For instance, The National Academies’ assessment drew together the effects of vehicle construction, fuel extraction, refining, emissions, and other factors… it concluded that the vehicles’ lifetime health and environmental damages are actually greater than those of gasoline-powered cars. Indeed, the study found that an electric car is likely worse than a car fueled exclusively by gasoline derived from Canadian tar-sands!” ~ Ozzie Zehner
From what I’ve seen, Ozzie’s claims are simply untrue. Have you seen the original source for his claims for the National Academy of Sciences?
For instance, GM says that .87 tons of CO2 and 2.22MWh are used to make their cars, on average. At 8.887 kg of CO2 per gallon, and 27 MPG, that’s 2,639 miles worth of fuel. That suggests that only about 2% of a car’s lifetime emissions come from it’s manufacture.
So, it’s really doesn’t take much energy to make new cars to replace old, fuel intensive vehicles.
http://www.greencarcongress.com/2014/05/gm-reduced-energy-intensity-and-carbon-intensity-per-vehicle-in-2013.html and http://www.gmsustainability.com/
Ozzie Zehner “Energy Consultant” out of Berkeley? Sounds a lot like Tad Patzek “Energy Consultant” out of Berkeley? – Paid millions by oil companies to attack alternatives. They must be worried.
Tad’s the President of ASPO.
As for his analysis of the dismal EROI of ethanol and other biofuels, I’d say he is spot on.
Except, that it’s not energy return on investment that matters, but liquid fuel return on liquid fuel invested.
And that’s 5:1.
What kind of metric is that?
Are you saying for each barrel of diesel you’re getting five barrels of ethanol?
You are probably leaving fertilizer, electricity to deplete the Ogallala and irrigate the crop, and propane to dry the crops, amongst a few other items, off the ledger.
And the big elephant that should be mentioned is the depressing levels of soil erosion.
I once was a fan of biofuels, but once you look at them with a systems perspective you kind of have to recognize that they are just an exercise in desperation. One happily cheered on by Big Ag.
By the way, my cousin cash crops corn and soya in SW Ontario. And I’ve spent a couple of summers working on farms. So I’d be supportive of biofuels if they weren’t a huge wasted effort… but they are.
2 million barrels/day of liquid transportation fuel is hardly a “wasted effort”. It also takes a huge amount of energy to produce and refine oil into usable products. EROEI is simply a “made up” metric that has no relevance whatsoever. The only metric that really matters is what it costs to produce the product vs. what it can be sold for. Biofuels have been around for thousands of years, and they’ll be around for thousands more years. Criticism of biofuel is nothing new, yet the quantities of biofuel produced continue to increase every year.
Perhaps the “real” reason some people don’t like biofuels (and other alternatives), is that they blow a big hole in the erroneous notion that oil can’t be replaced. A notion they have heavily invested into, and can’t quite admit that they were wrong.
That’s a great place for someone that is bought and paid for by the oil companies. Look it up. Of course he also wants to discredit alternatives as much as possible.
even Forbes’ contributor thinks Zehner’s claims are bogus.
http://www.forbes.com/sites/jamesconca/2013/07/21/are-electric-cars-really-that-polluting/
The above has the NAS study link, as well as the Union of Concerned Scientists study link.
Zehner can’t see straight for all his hand-wringing.
I don’t know if he’s a paid shill for big oil, or just a contrarian, but he’s certainly a nattering nabbob of negativity. I’ve tried to straighten him out on alleged rampant greenhouse gas emissions from solar cell production – to no avail.
He reminds me of Lomborg’s Skeptical Environmentalist.
I was reading through and found that vegetarians get too much of certain nutrients. Huh!? I checked the reference, and it said the opposite.
Some people just see only what they want to see.
http://www.lomborg-errors.dk
Forbes magazine?
Is that that magazine that’s focused on Business As Usual? Like, finance (“LOL”) and industry (LOLz)?
But Zehner (and far from just Zehner) doesn’t have to do anything anyway. The crony-capitalist-plutarchy uneconomy does it all to itself, if, alas, also to the rest of the planet.
Car-based culture is a joke, and I’m unsure that, at this stage, ‘we’ can make it one that’s not played on us.
How is that relevant to subsidy probability?
It suggests that there are better and cheaper alternatives for public policy makers than subsidies for oil.
Oil is already heavily subsidized (military, pollution, etc.,etc).
Oil is expensive, dirty and risky. We should kick the habit ASAP, and invest our public and private money in better things, like EVs.
All you have to do is elect people who embrace that by withholding your vote from anyone who doesn’t make that the focus of their campaign.
And the issue is probability of subsidy, not morality — which pretty much sums up 2008 onward, economically.
You have to do more than that: money is speech, or so the Supreme Court tells us.
And, I’m not talking about morality, I’m talking about down and dirty costs: $trillions for oil wars, for example.
If Bakken producers can’t make a profit at $50 a barrel then they are losing money.
Sub-$50 Oil Surfaces in North Dakota as Regional Discounts Swell
Oil market analysts are debating if oil will fall to $50. In North Dakota, prices are already there.
Crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28, according to the marketing arm of Plains All America (PAA) Pipeline LP. That’s down 47 percent from this year’s peak in June, and 29 percent less than the $70.15 paid for Brent, the global benchmark.
The cheaper price for North Dakota crude underscores how geographic and logistical hurdles can amplify the stress that plunging futures prices have put on drillers in new shale plays that have helped push U.S. oil production to the highest level in 31 years. Other booming areas such as the Niobrara in Colorado and the Permian in Texas have also seen large discounts to Brent and U.S. benchmark West Texas Intermediate.
“You have gathering fees, trucking, terminalling, pipeline and rail fees,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.”…
Much of that new output is coming from areas that are facing steep discounts. Bakken crude was posted at $50.44 a barrel yesterday. Crude from Colorado’s Niobrara shale was priced at $54.55, according to Plains. Eagle Ford crude cost $63.25, and oil from the Oklahoma panhandle was $58.25.
At 300 bpd avg for the year, $50/barrel (slashed by 20% for royalty and extraction tax) that well generates 4.38 million dollars in 1 year.
A 5 yr loan of $10 million at 5% interest to have drilled and fracked the thing will make demands of $2.5 million that year for cash to service that loan.
We got then 1.88 million dollars left to pay oil trucking, maintenance water, water disposal, water trucking in both directions, and it’s likely a private road so multi season road maintenance.
Next year that well ain’t gonna flow 300 bpd, but most of those costs don’t decline and in fact the water disposal cost may increase if the water cut does.
Now since it’s borrowed money, the company doesn’t need 10% per year on the 10 million. Just 10% of whatever their commitment is. So there’s no requirement for another $1 million from that well per year. But regardless of all this, odds look pretty good that 300 bpd is about where cashflow goes negative, and it don’t take long to get to 300 bpd. Some wells START there.
BTW Ron, let’s keep an eye on that Dan Murtaugh at Bloomberg. I think this is the first article in the mainstream financial media to note that WTI is not what the producers get.
Boom.
That was fast. Finance.yahoo.com just picked up that article.
This is a good one as well:
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/12/Total%20Jobs%20vs%20Energy%20Jobs_0.jpg
from
http://www.zerohedge.com/news/2014-12-03/jobs-shale-states-vs-non-shale-states
The problem, then, is that we’ve become an economy primarily driven by getting fossil fuels out of the ground. I wouldn’t say that is progress.
That would be like having everyone going back to growing their own food and pointing out that agriculture is now the primary way people are being employed.
Stop and think about it. What if we had to put everyone back into the coal mines in order to keep the economy functioning.
Not a good scenario.
It doesn’t matter if it’s good. Not clear at all to me why these green enthusiasts can’t get their mind wrapped around probability vs good.
The article, posted above, is making a clear case that the economy is much more shale dependent than anyone is focused on, and if shale is threatened, the government or Fed will react.
No government would tolerate GDP destruction and starvation in order to toe some line about not supporting oil. This article is the first explicit presentation of building the case towards inevitable subsidy.
But one problem with saying the government needs to prop up the oil industry for employment reasons is that these jobs aren’t distributed equally around the country. Relatively few states will benefit. Convincing politicians in states where there are no fossil fuel jobs may be a challenge.
In contrast, military-related jobs are in many states. So there are a lot of politicians protecting jobs within their districts.
If Congress is trying to cut government spending, and then just a few states are getting what is left, I don’t think everyone will support it.
If you read the articles, the job growth and GDP seems to mostly be in the shale states. If you want to protect those metrics, and to hold the WH the Democrats probably have to want that, then presto.
As has been discussed before, the amusing part of it all will be the GOP states maneuvering for subsidy.
But after the ebb and flow of political this and that you have to make a decision on starvation and the easiest decision is a bailout.
If you read the articles, the job growth and GDP seems to mostly be in the shale states. If you want to protect those metrics, and to hold the WH the Democrats probably have to want that, then presto.
As has been discussed before, the amusing part of it all will be the GOP states maneuvering for subsidy.
If the White House wants to prop up shale states to claim credit for the employment there, the kneejerk reaction from the GOP would be to block it.
But I don’t think anything will happen before the next election. Things would have to move pretty fast.
Also, the GOP plans to push through legislation for the Keystone pipeline. They are stressing how important it is. (And also how many jobs it will create.)
But if the Keystone pipeline is the key to the success of the oil industry, then why would additional subsidies be needed on top of that? Wouldn’t that undercut their arguments in favor of the pipeline?
Nothing happens until the companies contact the NoDak GOP senator. There is also a Dem senator from there.
If you get a “bipartisan” request for subsidy, it takes on a whole different flavor.
Exclusive: New U.S. oil and gas well November permits tumble nearly 40 percent
By Kristen Hays, Reuters, HOUSTON Tue Dec 2, 2014 7:39pm EST
40% less holy on the on the AM radio – Rodger Headgerock show (?). Solution is obvious. CALL OPEC’s Bluff. USA can out drill anyone on the planet. We are the global champion of oil. Drill Baby Drill. The one left standing in a quagmire of debt and pollution wins because the winner shall have more wells. However, Spot on about OPEC members need to roll back subsidized fuel to keep the sheeple from revolting.
I don’t know how long it will take for the US Shale plays to react, but it has already started with Australian Oil & Gas companies.
http://www.abc.net.au/news/2014-12-04/santos-shares-slump-after-company-scraps-plans-to-raise-money/5942232
Santos shares slump after company scraps plans to raise money, cut capital expenditure
Santos shares have slumped after the company scrapped plans to raise money and cut capital expenditure.
snip
“Given the current oil price environment, it is prudent for the company to review its spending plans for 2015 and we expect to significantly reduce capital and operating expenditure,” Mr Seaton said.
What kind of rock were they drilling in?
Watcher,
http://www.santos.com/company-profile.aspx
They are mainly a gas company, their origins was in the Cooper Basin supplying Sydney and Adelaide with gas but some oil as a bit of cream. All conventional. Has some offshore around Asia, O&G. In may they had a major LNG plant start up in PNG, where they a have minor holding, but their big ticket item is a LNG plant about to open next year. This is based on Coal Bed Methane, but the big kicker was they planned to borrow a few hundred million in Europe to stitch things together until the big money started coming in next year. They have decided instead to cut Capex. I feel this could be repeated many times in the US as the shale plays go begging for money. We will see in the next two months I feel.
They have played a little with shale, but purely on a pilot/research basis.
We hear the occasional bogus announcement of huge oil discoveries in Australia, but generally speaking Australia is somewhat off the oil radar screen. This is good info.
Watcher/Anyone,
8 months after the hype died down about the “bogus announcement of huge oil discoveries in Australia” the full report was actually released.
http://member.afraccess.com/media?id=CMN://2A773548&filename=20131212/LNC_01476229.pdf
Lots of reading, but to sum up, it was purely a desktop study using old well data. They have actually finally just gone back to do some exploration wells. Current 3/4 the way through the first one. They have at least had some florescence in the upper most likely section, but it is the lower section that is suppose to hold the bulk of any oil.
If it pans out it is going to 5-10 years before you see anything significant, but for the moment it is as you say more hype than substance.
http://online.wsj.com/articles/saudi-arabia-believes-oil-prices-could-stabilize-around-60-a-barrel-1417623664
Take time to read it and make what you will of it.
ONE thing that seems to escape the heavy weights even at a paper such as the WSJ is that future demand and current prices are NOT very well correlated in any expendable commodity. Even a simple backwoods apple farmer educated at a cow college ( any one of the fifty land grant universities) can understand WHY.
The CURRENT price of oil is determined by what CURRENT buyers are willing to pay and what CURRENT producers are willing to sell for. This statement will remain a fact tomorrow and the day after and next year as well.There are plenty of desperately cash strapped sellers TODAY and not enough buyers with ready cash TODAY for oil to sell TODAY at TODAY’s modest price of around sixty to eighty bucks depending on the QUALITY of it and WHERE the oil is.
If there are still plenty of cash starved sellers NEXT year in comparison to the number of cash flush buyers NEXT year then oil will stay cheap next year.
BUT next year has hardly anything at all to do with TODAY”s price.
There has never been ”A ” price for oil except as a shorthand method of discussing the price of it. Nor has there ever been ” a” price of apples or lumber. THE price always depends on who you are and what quality you want. If you are selling prime yellow poplar timber in my neighborhood the price of it is about ten percent of the price of it at the local big box store if you want to buy back a really nice board.If you want only an ”average” board the price is only five times the wholesale price at the farm gate.
NOW the PRICE of the STOCK of an oil company or a company involved in the oil industry can and does go up and down depending on what people think will or might most likely happen tomorrow and the next day and next year.
I am painting fast with a broad brush but my point should still be clear.
Future expectations just don’t have much to do with current prices of any commodity except a very few which are so valuable and in such short supply that they can be easily hoarded as speculative investments. Some of these are gold, silver, other precious metals and gemstones etc.
( The folks who think diamonds are worth a hell of a lot have a cartel to thank for this mistake and when that cartel eventually folds and all the diamonds it has stashed away eventually hit the market diamonds are going to be relatively worthless compared to todays price.Ten or twenty cents on the dollar might be a realistic guess .)
My guess is that with wholesale prices in the general neighborhood of sixty or seventy bucks that a lot of marginal production is going to turn yellow on the vine over the next year or so which will have the effect of shortening supplies and raising prices to some noticeable extent.
I just can’t see any oil company leasing a deep sea rig and going after a new field under a few thousand feet of water this year or next year unless management is firmly convinced the price will be up again by the time the oil is ( hopefully ) flowing out of that new field.
Now it is probably management’s best bet to go ahead and finish a project that is well under way since the money already spent can be recovered only by selling oil from that project. The sunk money is not the question now in such a case. The question is can the project still generate a profit on WHAT IT WILL COST TO FINISH IT up and put it into production.
I agree, and I think the remarks you made about current prices fit into the conversation Dennis Coyne and I were having about the steep demand curve.
Energy substitution can be real. Make what you will of this article.
http://www.industryleadersmagazine.com/floridas-nextera-energy-acquire-hawaiian-electric-industries-4-3b-deal/
It is entirely possible that Hawaiians will not be using oil as their primary electrical generation fuel within a decade.
Now as to what will actually happen one very smart old TOD hand whose name I do not mention without permission believes the industry will cry ” impossible ” sometime after announcing these plans and say they have no practical choice except to build coal fired generation. This would be the bottom line choice more than likely for management and stockholders in his opinion.
It is a fact that Hawaii has excellent sun and so far as I know some decent wind sites too and I do expect some serious renewables investments to be made as the result of political pressure if for no other reason.
Mac,
Both Hawaiian Gas and Electric have made arrangements to import LNG from Canada. Canada due to the Jones act. To start it will be in ISO shipping containers. When volumes build up, they will import in bulk. Yes they are increasing solar, but oil will get the finial flick due to LNG. RBN did a few articles on it several months ago.
Hawaii also has great geothermal potential. No idea why they wouldn’t want to develop this industry.
Some people believe that the volcanoes and the hot rock associated with them are natural gods, and should not be tampered with. Also, Hawaii is a collection of 8 main islands, and they do not all have the same geothermal potential. And they all have separate power grids.
When people and politics are mixed into a decision you should never say never or always.
BUT I think in is all but a foregone conclusion that new pipelines running east and west are going to be built in Canada and that they will reach both coasts.
They simply can’t afford not to build them.
http://www.thespec.com/news-story/5178683-ontario-narrows-its-concerns-about-energy-east-pipeline-project/
Of course the people along the routes are going to continue to fight the pipelines but it appears that this is already basically a rear guard fight based on collecting as many local goodies and concessions from the builders as possible.
The Keystone will be built too imo. The odds of it are probably ninety percent or better given the new congress and the next presidential election.I just don’ t see the Democrats wanting to run on NOT building it next time around.
A different take on Keystone.
http://www.thefiscaltimes.com/columns/2014/12/03/why-keystone-xl-pipeline-already-dead?onswipe_redirect=no&oswrr=1
1,645 billion barrels of proved reserves.
1,645,000,000,000/77,000,000=21,634
21,634/365=58.53 years of oil consumption left to go.
What is everybody worried about? Don’t worry, be happy.
That is in 2072 that all of the oil will be all gone, so there is really no worry until the time comes. In the mean time, the people of the world can continue to burn oil with reckless abandon.
Plenty of time to solve the problem of 100 percent depletion of oil. If we wait until 2070, there is a couple of years of consumption left to go, so the problem could be placed on a back burner and not addressed until then. /sarc
It’ll be pell mell chaos, mayhem, but it’ll be good for those who hoarded oil, they’ll realize a huge profit when oil is 1000 dollars per barrel.
EIA proved reserves by country:
http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=57&aid=6
Ronald,
Are you proposing that from here on out global oil production will remain constant for every single day, and will then drop to 0 after 58 years? Do you think that the last barrel will be as easy to extract as the first? And do you really believe the OPEC reserves figures, given that they’ve not decreased at all over the last 30-odd years of intensive production and that they magically got increased during the 80’s quota wars?
Perhaps Ronald made some simplifying assumptions to facilitate his calculations? If so, it wouldn’t be the first time someone made long term projections based on rather tenuous presumptions. 😉
Hi Doug,
Nobody would be that foolish! 🙂
When the population reaches 9 billion in twenty years, the oil needed probably will be 99 million bpd, so the amount of time is even less than 58 years, if efficiency doesn’t increase.
Makes it probably in just a short 50 years of oil burning to go before it all goes to hell in a hand-basket. At eleven billion, 40 years. In twenty years, the clock will tick faster.
The calculations are basic because it is just to illustrate that time really is running out fast. 150 years of burning oil to find out there is 1/3 of the time left until it runs out for good is what besides kind of frightening.
Peak Oil was there at the beginning of the oil age and it has been there ever since. I remember a class in the eighth grade when the instructor stated that scientists had predicted the year of oil to run out was 1985. It has come and gone and there is still oil left to go. Makes Peak Oil kind of a chicken little category.
Coal to liquids might lengthen the time to realize the end is near, the light at the end of the tunnel is really a train, but it will probably worsen the situation, not help.
634 yards of concrete in the base of a wind tower. 0.8 barrels of oil to one yard of concrete, 480 plus barrels of oil to build one concrete base for a wind tower.
480 x 3,800,000 = 1,824,000,000 barrels of oil just for the concrete bases for them, not counting the oil to manufacture the rebar required in the concrete base.
Plus 1000 gallons of oil in each nacelle, 25 barrels.
25 times 3.8 million equals 95,000,000.
2.2 billion barrels.
Plus the oil to manufacture the stands, the blades, the transportation costs, the amount of oil used to complete the construction of the wind turbine at the site.
Plus the rebar used and the amount of oil consumed to manufacture the rebar. How much oil to make a ton of rebar and how much tonnage into one wind turbine base?
Three truck trips per tower, 250 miles one way, five miles to the gallon, 50 gallons, 150 gallons of diesel per tower times 3.8 million. That’s 13.5 million barrels of oil to deliver the towers to the sites.
2.33 billion barrels of oil. Now start counting the coal used to generate electricity and manufacturing plants requiring coal and oil to build them.
Add all of the inputs to build the 3.8 million towers, add in the time required and the amounts become somewhat of a pipe dream. The amounts of oil to get the job done is a limiting factor, along with time. You need oil to build wind turbines, the job doesn’t have a chance without coal and oil.
It is not going to happen and if it does happen, the damage will be done.
With Peak Oil in mind, it is a wonder it is even considered at all. Oil is the last thing on the minds of renewable energy wonks and the first input required. Cognitive dissonance once again.
It is Peak Oil, it might not look like it is with all of the oil running through the pipes and wells, but it most definitely is.
Wind turbines will not save mankind and will not solve the energy crises that will obviously become more exacerbated in the near and far future.
More Catch 22’s coming. Back to the drawing board.
‘is what is kind of frightening’
not ‘is what besides kind of frightening.
Go to NREL and ask about turbine time to generate ALL of the energy required to make it.
Now, tell us what they said it was.
Hi Sam,
The OPEC reserves are about 470 Gb according to Jean Laherrere at the end of 2013 if no reserve growth or discoveries have occurred since 2010. This excludes the Orinoco belt reserves.
Dennis,
I’d take Jean’s word over theirs any day!
Oil reserves are now much lower, because oil price dropped. First you can substract Canadian tar sands not under development, and Wenezuela tar sands. So it’s already 10 years of consumption less just from these two resources.
Hi Ron,
Continuing our conversation from the link below:
http://peakoilbarrel.com/peak-oil-2014/comment-page-1/#comment-462011
An alternative model with oil prices fixed at $71/b (I do not think that scenario is realistic, it is intended to be a lower bound). New wells added starting in October are as follows:
Oct-14-Nov-14–Dec-14–Jan-15–Feb-15—Mar-15—Apr-15–May-15–Jun-15
200—–190——-180——170——-160——120——-80——-40——–0
This gives us 1000 new wells from October through March, with a quick ramp down from March to June, drilling rates would begin to slow rapidly by February, this scenario assumes that the new well EUR decreases starting in June 2014 and reaching its maximum rate in Dec 2014 (at 8% per year), without this decrease, wells are profitable at $71 per barrel and drilling could continue until such a decrease in new well EUR begins. I do not know when there will be a decrease in new well EUR, nor how quickly the EUR will decrease. Chart for alternative model below.
Where’s the chart from 6 months ago. That’s the only one that matters.
Hi Watcher,
Oil prices matter, I did not expect low oil prices 6 months ago. I am pretty sure that you were not suggesting $71/b oil 6 months ago. Chart below with 6 scenarios representing the USGS F5, F50, and F95 cases for TRR with the usual economic assumptions and two price levels low (fixed at $80/b) and high (similar to EIA AEO reference oil price scenario). Chart from May 2014. Oil prices matter as do assumptions about TRR, I usually use the USGS F50 for my underlying model before economic assumptions are imposed.
Canadian pipelines to their coast(s) are a self preservational thing.
Without them, especially to the Pacific coast somehow, the oil sands are an obvious nuclear target for someone trying to starve the US. It’s the sort of target that is sufficiently fuzzy that an instantaneous US retaliatory strike is not guaranteed.
Hi Ron,
In response to your comment about why my views have changed, it is because oil prices have changed which will make drilling new wells unprofitable. I thought oil companies would react by slowing down their drilling more quickly, clearly that was incorrect because the rig count has been steady through the end of November, I imagine here will be the usual winter slowdown in well completions so by December I expect that new wells will be 150 or less.
I agree wells already drilled and those that have started drilling will continue, but I think Capex for planned drilling will be slowed considerably by Jan 1.
Yet another scenario with new well EUR decrease starting 6 months later in Dec 2013 and reaching a maximum rate of decrease of 7% in June 2015. New wells added fall by 10 each month from Oct to March then remaine at 150 wells/month until June 2015, then rapidly fall low levels (5 well or less) by the end of 2015 with no wells added after June 2016. Again this guess at EUR decrease is speculative, we will tnot be able to confirm it until 6 months or more after it has begun, new wells are profitable at $71/b if EUR never decreases (highly unlikely).
See, this is not considering credible variables.
Like what would be completely an obvious need for price covenants in the debt instruments.
“If Bakken Sweet prices decline below $65/barrel, this loan is due immediately in its entirety.”
How’s the graph look then?
Hi Watcher,
It would look like this. Except this was done in May, so the current peak would be higher but the shape on the downslope would not be very different.
Really?
How would they pay the truckers if their already existing loans are due immediately?
Declare bankruptcy, continue to operate while bankruptcy is resolved, loan would not be repaid in full in the meantime.
So the morning opened with Super Mario having said no ECB QE until mid next year and that perversely trashed the Euro (as usual, in the new normal if you print money it makes your currency stronger instead of weaker) and elevated the dollar, and oil was thus down to the low $66s.
About 90 mins ago the algorithm movers floated a report that was explicitly contrary to what Draghi himself had said — claiming there would be an ECB QE plan on the table for approval in January. The headline reading algorithms moved immediately to spike the Euro (lower the dollar) and oil is now floating around $67.
Super Mario will eventually be told to save shale. How weird is that?
In the context of the world has gone insane, examine the nuances and what’s between the lines of this article entitled Draghi Says He Will Not Allow Dissenters To Stop QE.
“Painting a gloomy picture of the euro bloc’s prospects, Draghi announced that the ECB expected economic output to be lower in the coming years than it had predicted three months ago, while a slump in the price of oil would further weaken inflation.
Very low inflation is seen as a trigger for ECB action such as printing fresh money to buy government bonds, a step known as quantitative easing (QE) which Germany opposes.”
Note “weaken inflation”. As if inflation is something one wants strong.
Note the government bonds in question are not EU bonds (which don’t exist). They are sovereign bonds of Italy, or France, or Spain, or Portugal.
It’s the equivalent of the Fed buying California bonds or Illinois bonds, providing a guaranteed buyer and backstop against any possible bankruptcy, and of course permitting those states to ramp up deficits to the moon, since they would always have a guaranteed lender. Oh, btw, when Cali had its crisis a few years back they asked Bernanke if he would buy their bonds. He said the Fed under no circumstances was permitted to do that. It would be illegal.
Behold global oil scarcity induced deflation, and attempts to counter it with redefinition of pieces of paper.
@OFM I think you underestimate the amount of opposition to the pipelines in many places. The farmers are the fiercest opponents in my state. Many of these have farms have been protected by agricultural preservation easements so the state is involved as well.
If the pipeline builders were smart they would try to go along already developed rights-of-way but that raises costs and highlights the fact that these things are dangerous.
People are becoming more and more aware that they are being asked to pay for and subsidize the costs of pipelines that are ultimately intended to take fuels to the coasts for export. Then there are the people who live near the planned export terminals and the routes of the ships that will take them abroad. They are not happy either.
It seems the whole world is being turned into a sacrifice zone and is waking up to that fact.
Ron and crew, Should the drop in prices keep going we ay not get to see the geological peak of LTO only the “financial” peak if you will. Though I suppose it to be only a fool’s errand, would anyone hazard a guess at the timing of this? I always think of Hemingway’s character when speaking of his bankruptcy….slowly, then all at once. The ramifications of this can be a a bit frightening for those not previously aware that the financials appear to be held together with duct tape, baler twine and a rusty vise grips.
Very good, Phillip. But.
The penultimate value of Ron’s focus on the numbers is that even if they are tweaked and corrupted, they are there and provide a database. The financial peak vs the geologic peak is most definitely a powerful reality, but as regards duct tape and baling wire, never ever ever ever forget what happened in 2011. When Greece threatened global destruction, governments ignored laws, changed them, and violated them with impunity.
The same is true for oil. If you MUST have shale oil and it’s still there in the geology, then you WILL get it by government intervention. The only thing printed money or changed laws can’t address is what Ron is hoping to detect . . . an outright absence of oil. You can’t print oil.
In the end the only cost to society resulting from such government intervention is loss of the normalcy facade — which is not insignificant.
LOL
Understatement-of-the-month?
Nah. People have to go to the store and buy food. They have to keep their schedule doing whatever. If word emerges that the pretense that things are normal and all is well was a lie, they’ll still go to the store to buy food and keep their schedule.
The lost facade is not meaningless, but it won’t cause any everyday, average person changes.
While I do agree that what you say in these last two connents is likely, I would be curious as to what form an intervention would take. I recall reading (on this site I think but not sure) about a (wellhead?) tax that has been deferred for perhaps it was five years in the LTO fields. Limited, but far easier than printing bux or changing or stretching laws. A small blurb in the mainstream media that folks gloss over and forget and will not likely even show up as a dent or scratch in the facade.
Ron, you often mention Bazhen shale in Siberia, but Domanik shale in the Volga region is much more interesting. No need forest to cut and drain the swamp. Developed infrastructure. Paleozoic Domanik – analogue of Bakken in Russia.
Paleozoic
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