EROEI FOR DUMMIES

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Posted on 29th October 2012 by Administrator in Economy |Politics |Social Issues

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Sometimes I wonder whether the idiots who blather on about American energy independence and hundreds of years of supply are shills for the oligarchs or whether they are just plain dumb. Maybe one of you can explain. Even a CNBC anchor bimbo should have the brain power to understand the concept of EROEI. The U.S. has been using less oil since 2008, but the cost keeps going up. 2012 will finish with the highest average price for a gallon of gasoline in the history of the country. We are not in control of our energy destiny. The cost to retrieve the remaining fossil fuel resources will continue to rise. Worldwide demand will keep rising. The easy to access oil has been burned. Math is hard. So is reality. Charles Hugh Smith with another fact filled article of truth.

Why Energy May Be Abundant But Not Cheap   (October 29, 2012)

 It doesn’t matter how abundant liquid fossil fuels might be; it’s their cost  that impacts the economy.
Many people think “peak oil” is about the world is “running out of oil.”

Actually, “peak oil” is about the world running out of cheap, easy-to-get oil. That means fossil fuels might be abundant (supply exceeds demand) for a time but still remain expensive.

The abundance or scarcity of energy is only one factor in its price.  As the cost of  extraction, transport, refining, and taxes rise, so does the “cost basis” or the total  cost of production from the field to the pump. Anyone selling oil below its cost basis  will lose money and go out of business.

We are trained to expect that anything that is abundant will be cheap, but energy is a  special case: it can be abundant but costly, because it’s become costly to produce.

EROEI (energy returned on energy invested) helps illuminate this point. In the good  old days, one barrel of oil invested might yield 100 barrels of oil extracted and refined for delivery.  Now it takes one barrel of oil to extract and refine 5 barrels of oil,  or perhaps as little as 3 barrels of unconventional or deep sea oil.

In the old days, oil would shoot out of the ground once a hole was drilled down to the  deposit. All the easy-to-find, easy-to-get oil has been consumed; now even Saudi Arabia  must pump millions of gallons of water into its wells to push the oil up out of the ground.  Recent discoveries of oil are in costly locales deep offshore or in extreme conditions.  It takes billions of dollars to erect the platforms and wells to reach the oil, so the  cost basis of this new oil is high.

It doesn’t matter how abundant liquid fossil fuels might be; it’s their cost that impacts the economy.   High energy costs mean households must spend more of their income on energy, leaving  less for savings and consumption.  High energy costs act as a hidden “tax” on the economy,  raising the price of everything that uses energy.

As household incomes drop and vehicles become more efficient, demand for gasoline declines.   Normally, we would expect lower demand to lead to lower prices.  But since the production costs of oil have risen, there is a “floor” for the price of gasoline.  As EROEI drops, the price floor rises, regardless of demand.

This decrease in real incomes and ratcheting-higher energy costs could lead to a situation where energy is abundant but few can afford to buy much of it.

The relative abundance of fracked natural gas and low-energy density fossil fuels like tar sands and shale has led to a media frenzy that confuses abundance with low cost.This article (via correspondent Steve K.) illustrates the tone and breezy selection of data to back up the “no worries, Mate” forecast of abundant cheap liquid fuels:An economy awash in oil. (MacLeans)

Not so fast, reports Rex Weyler of theDeep Green Blog.Here is Rex’s response to the above article.

Fair point about the volume of unconventional – deepwater, shale gas & oil, tar sands, etc. – hydrocarbons. These reserves may even produce peakies and/or sustain the plateau longer than some observers believe. However, biophysical restraints remain real; peak oil remains real; peak net energy appears imminent, and the impact on economies is already being felt globally. Points to consider:The dregs:In spite of huge shale & tar reserve discoveries, peak discoveries  remain well behind us, in the 1960s. My father, a petroleum geologist his entire life (and still, in Houston, Kazakstan…), knew about shale and tar deposits when I was  a teenager in the 1960s. He called them “the dregs.” These deposits are not really news within the oil industry. And they are the dregs because of high cost, low EROI and rapid  depletion.

EROI:The volume of these low-net-energy reserves could extend peak oil production for decades, but at fast-declining net energy returned to society. We high-graded Earth’s  hydrocarbons, just as we high-graded the forests, fish, copper, tin, water, and so forth. We’ve taken the best, highest EROI hydrocarbons, the 100:1 free-flowing wells of the 1930s and 40s. We’re now into the 3:1 and 2:1 tar sands.

For example: damming rivers in Northern BC, to send electricity to the fracking fields,  to send shale gas to Alberta, to cook the boreal substrate, and mix the black sludge with gas condensate shipped in from California and by pipeline from Kitimat to Fort McMurray, to mix with the bitumen, to pipe to Vancouver Harbour, to ship to China, to burn in a  power plant, to supply electricity to their manufacturing empire.

By the time any of this energy gets used to actually make something useful to someone in society, and by the  time that user puts that usefulness to work to feed, clothe, house, or heal anyone,  there is no net-energy left.

Our food in North America is already negative net energy  by1:10 at best, up to 1:17 or worse for much of the crap we eat. This matters. EROI at well-head, EROI at the consumer pump, and EROI at the point of society’s actual  service all matter.

Well-head EROI, counting all public subsidies, is now in the 5:1 to 1:1 range for all  these “non-conventional” (meaning the dregs) hydrocarbon deposits. Money can be made.  Some energy can be delivered to Society, but this is already way below the well-head EROI that could likely run the current complexity of the human society, much less “grow” economies.

The degrading reserves take us down along the EROI curve, in which Net Energy returned to  society falls off a cliff around 6:1, and is in freefall by 3:1. Net-energy alone kills the idea of much economic growth from a booming hydrocarbon bonanza (other than some great  stock plays along the way). Furthermore, depletion renders the idea ever more unlikely:

Depletion:Depletion rates on these gas fields have arrived quickly and appear  drastic by historic industry standards. The fracking fields peak early and decline swiftly. In the Bakken shale field – one of the great North American saviour fields – the average  well has produced ~ 85k barrels in its first year and then declined at about 40% per year. The newer average wells peak earlier and decline faster, so the overall trend is down.

The depletion moves the production process along a function that approaches zero net  energy… Down we go along the EROI curve… 5:1 .. 4:1 .. 3 .. 2 … and then really complex society breaks down. An Amish farmer gets 10:1.

The Bakken break-even oil price is $85, so there is no profit in any of this right now,  but of course there will be if global depletion exceeds demand from crashing economies.

Depletion – both in volume and quality – and depletion for all industrial materials and  energy stores, EROI, and economic stagnation all work as feedback loops. No one knows  the bifurcation points in this complex system. We try to predict those, but miss by a longshot sometimes. Complex societies crash in this manner, declining returns on  investments in complexity, from Babylon to London and Washington. See J. Tainter,  H. Odum, N. Georgescu-Roegen, Hall, Cleveland, et al.

Here are some depletion data on The Oil Drum:Is Shale Oil Production from Bakken Headed for a Run with “The Red Queen”?.

See A Review of the Past and Current State of EROI Data (PDF)  by Hall, Cleveland, et al. (source: www.mdpi.com)

There is a lot of EROI data here: Obstacles Facing US Wind Energy. (The Oil Drum)

Below is the EROI curve, only the “We are here” point at 10:1 is the modern average, and  from a few years ago. The new conventional stuff is coming in lower and and the enhanced  recovery, shale and tar fields are already over the falls at 6 or 5:1 for the better stuff  (best dregs), and 3:1 to 1:1 for the dregs of the dregs, the deeper shale and tar sands.

So yes, our friends are correct about the great volume of tar, shale, deep, heavy  hydrocarbons, but increasing production of world liquid hydrocarbons much beyond the current 85mb/d is not likely, and increasing net productionis even less likely. As you may know, net production per capita peaked in 1979. Actual net production is  peaking now. This is the figure that counts: Actual current Net Production Delivered to  Society.

Growing this figure is technically possible, and may happen with some massive production  bonanzas, i.e. we may see actual production push above 90mb/day, or higher, and may  even see net production increase, but a major glut of hydrocarbons? No. Not remotely.

When settlers first came to North America, they found copper nuggets the size of horses  exposed in river beds. China just bought the best known, last, huge, moderate-to-low-grade,  strip-minable, high-cost copper field in the world, in Afghanistan, for $billions over the western bids. There will be others, but rest assured: They will be lower grade, higher  cost, and the competition will be more intense. When was the last time you bought a “copper” fitting at the hardware store. They’re crap. The alloys are crap. Because the ore  quality is in decline and the costs of extraction are rising. Same with oil, trees, tin, coal….

Make no mistake: The war for the dwindling materials and energy flow is well underway.

Thank you, Rex, for this commentary on EROI and the quality and cost of hydrocarbon resources.Complex systems like economies are nonlinear, and so history does not necessarily track linear extrapolations of present trends.  With that caveat in mind, the preponderance of evidence supports the notion that fossil fuel energy may remain abundant in the sense that supply meets or exceeds demand in a global recession, but the price of liquid fuels may remain high enough to create a drag on growth, employment, tax revenues and all the other economic metrics impacted by high energy costs.

Resistance, Revolution, Liberation: A Model for Positive Change  (print $25) (Kindle eBook $9.95)

Read the Introduction (2,600 words) and Chapter One (7,600 words)for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.

The process of the unsustainable collapsing and a new, more sustainable model emerging is  called revolution.

Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves.  A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s  dominance.

 

If this recession strikes you as different from previous downturns, you might  be interested in my book An Unconventional Guide to Investing in Troubled Times (print edition)orKindle ebook format. You can read the ebook on any  computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.  The solution in one word: Localism.
Readers forum: DailyJava.net.

Order Survival+: Structuring Prosperity for Yourself and the Nation(free bits)(Kindle) orSurvival+ The Primer(Kindle)  or Weblogs & New Media: Marketing in Crisis(free bits)(Kindle) or from your local bookseller.

Of Two Minds Kindle edition:Of Two Minds blog-Kindle

A TRUE PICTURE OF THE CANADIAN OIL SANDS

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Posted on 23rd October 2012 by Administrator in Economy |Politics |Social Issues

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 Whenever you hear the peak oil deniers tout the hundreds of years of supply in North America, remember the pictures in the story below. I’m not an environmental nutjob and I think we should convert oil sands into oil because we have no choice. But oil sands are not going to save us from the impact of peak oil. After seeing what it takes to turn oil sands into oil, you’ll understand why the EROEI is so low for this natural resource. The breakeven price for oil sands to be profitable is in the range of $80 to $90 per barrel. Don’t count on gas prices to ever go back to $2.50 a gallon like Romney is promising.

These Pictures May Give You Nightmares About The Canada Oil Sands

Canada’s economic boom depends on tearing up 54,000 square-mile of pristine Alberta wilderness.

 

Development of the world’s third largest oil supply is proceeding rapidly. It already represents a $3.5 billion annual paycheck to the Canadian government and 75,000 immediate jobs.

But many are aghast at the project, which is also the fastest growing source of greenhouse gas in Canada.

When you see the pictures, you may feel the same. We’re not saying the project is good or bad. We’re just saying the scale and severity of what’s happening in Alberta will make your spine tingle.

Business Insider sent me to Alberta in early May, when there was still ice on the ground and a bite in the air. I took these shots, trying to stay warm, from about 1,000 feet up, out of the window of a small plane.

The following pictures show oil mining, where the sand is dug from the ground and the oil’s separated through a lengthy and messy process. There are drilling sites in the oil sands, and those are highlighted in the photo essay at the end of this one.

 

To get a look at the oil sand mines, we rented this Cessna 172 which the pilot was allowed to bring down to 1,000 feet — from there, through the open window and with a long lens we were able to see what really goes on in one of the most controversial places on the planet

The Alberta oil sands are spread across more than 54,000 square miles but we’re taking a look at just a small part of that — the red line is an approximate outline of the entire deposit — the green is where we’ll be flying

But thousands flock here to make real money in the oil sands — where creating synthetic crude begins in the strip mine

This is how the oil sands have been harvested since 1967

There were only two companies working the sands in 1998 and local officials were concerned even those would be forced to close — there are more than 10 times that number here now

That’s because in the late ’90s oil prices rose, the Canadian government restructured its royalty system, and new technology caused a huge boom

From small companies to conglomerates like Shell — each outfit starts off the same way

First they clear the trees from the land

Then they scrape away the shallow layer of leafy, peaty topsoil called muskeg

Then the trucks and shovels come in to scoop up the oil sand — that shovel is electric, runs on 15,000 volts — and scoops up 90 tons in one load — it takes about 2.5 tons of sand to produce one barrel of oil

The Cat 797 dump trucks are the largest in the world and and can haul 1 million pounds in a single load — more weight than a fully loaded Boeing 747

They’re so large people say they can drive over a Ford F-150 like it’s a ‘speed bump’ — with this shot from outside a mechanic’s shop it’s easy to see what they mean

They're so large people say they can drive over a Ford F-150 like it's a 'speed bump' — with this shot from outside a mechanic's shop it's easy to see what they mean

Robert Johnson — Business Insider

And the dump trucks are everywhere out here

Carrying the chunks of oil sand

Often across bridges like these, which are supposed to be the strongest in the world

To crushing plants like this, which break up the chunks into a fine mixture that can be transported along the conveyor belts below

The conveyors take the sand to be conditioned — the first step in separating it from the oil

Conditioning is just mixing the oil sand with water — creating what’s called a slurry — where the oil begins to part from the sand

The slurry is then piped to containers where it separates into three parts: Oil froth on top — sand on the bottom — oil, sand, clay, and water in the middle

The sand and water mixture in the middle is pumped to open storage areas called tailings ponds

The ponds are vast and some look more like lakes

Most ponds are coated in a sheen of oil that can be deadly to waterfowl, like ducks and geese, that land on its surface

To help keep birds away scarecrows like this are all over the ponds

The ponds are used to settle out the solids in the oil-water mix as they slowly fall to the bottom — the chemicals and oil float to the top

The surface chemicals are skimmed across the surface using floating lines like those used in oil spills

To give an idea of the size — that dump truck passing the pond is 50-feet-long

This is what one pond looks like on the ground

And this is what the surface material looks like up close

After it’s skimmed and the surface water is relatively sediment and chemical free — it’s pumped from one pond to another

This clarified water is supposed to provide 90 percent of what the oil companies need to start all over again

The solids left behind will be used to reclaim the land as the operation moves on

As the sand finally dries it turns white — sound cannons still boom to scare birds away though — especially after a 2010 incident where hundreds of ducks landed on a roadside pond and died

Oil companies are required to return the land to its original condition and this reclaimed section, populated with Wood Bison, is not far from the pond

It looks a whole lot different on this side

Once the rough oil is pulled from the sand it will get sent to an ‘upgrader’ like Suncor’s here on the Athabasca River — this is one of the sites where the oil from the oil sands is converted into synthetic crude

This is done by heating the raw oil, called bitumen, in a process called coking and produces the smoke that hovers about the whole area and a smell that fills the cockpit of the plane

Here are some small piles of coke

And here is one very immense pile of coke waiting to be used or sold as fuel for smelting iron

After it’s coked, the oil is ‘cracked’ to break the heavy parts down into lighter more desirable petroleum products

Cracked, coked and lighter, what’s left gets sent to a tower like this, where inside it’s hotter at the top than the bottom, forcing dense material down and lighter petroleum products up

Then everything is exposed to hot, high pressure gas that removes even more impurities like sulfur

The sulfur would normally then be sold

But a glut in the sulfur market is keeping prices low, and in the meantime mountains of it continue to grow

Once the oil is “upgraded” it will go to a storage tank like this one currently under construction

This is Syncrude’s Mildred Lake plant along Route 63

Route 63 is deadly, and a family of 7 was killed driving it the day I got there — this memorial is right across from Syncrude by the side of the road — after taking this photo Syncrude security was dispatched and told me to go

Just north of that tribute sit these two machines some companies used in mining up until 2006 — a dragline on the left, and a gray bucketwheel to the right

Spectacularly immense, this bucketwheel is the largest crawling machine in existence

For scale, that fence post is about six-feet-tall

These bucket teeth that dug into the sand were very effective, but when the bucketwheel broke down, mining stopped — so they were phased out in favor of the shovels and trucks

There are fleets of trucks and if one breaks down another one simply takes its place, but at $5 to $6 million apiece they are not cheap

And they go through tires pretty quickly —  the ones for the big dump trucks run about $45,000 apiece

At 13-feet — and 12,000 pounds each — the 797 tires are a burden to dispose of and they’re put to use wherever they can be

To keep vehicles from getting bogged down in the mud, these wooden boards will often be put down

But they’re not always practical, so a nearby gravel mine pumps out stone to layer the roads

The gravel mine produces its own uniquely colored pools of water

But they don’t compare to the deep orange of this oil sand pit we pass in the plane moments later

The companies out here all have their own landfills

Though city officials are building a state-of-the-art incinerator as part of their modernization effort

Most oil workers live in housing like this and are bussed in to the compound from their homes and families in Fort McMurray

There are no public gas stations up by the camps and sadly even this store was closed at noon on a Sunday

Which may have been just as well because the bootie dispenser outside the door was empty

The average dump truck driver makes about $55 an hour plus overtime working the mines and the average family income here is around $190,000

That kind of money prompts many people to settle down and stay far longer than they planned — this is where the pilot lives with his parents — he asked for a photo

And just as you would imagine, the people who live here are very concerned about pollution — this site was fined $275,000 for contaminating the Athabasca River just a year ago

The provincial government tests the area waters constantly

But the locals I talked to all said they’d like to see more transparency and updates on what exactly is being found and what they should watch out for

The oil sands, with its up to 2 trillion barrels of oil sitting in the ground, is a complex place

And despite how you may feel about the immense environmental impact the oil companies may have on the world

You can be sure they’re not going anywhere while there is still oil left to collect

Read more: http://www.businessinsider.com/photos-destructive-canada-oil-sands-2012-10?op=1#ixzz2A9EplXaW

IT ONLY TOOK A GLOBAL DEPRESSION TO REDUCE GAS PRICES BY 40 CENTS

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Posted on 10th June 2012 by Administrator in Economy

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You can’t watch the mainstream media propaganda channels for more than ten minutes without a talking head breathlessly announcing that gas prices have dropped for the 24th day in a row and are now back to $3.55 a gallon. Wall Street oil analysts, who are paid hundreds of thousands of dollars per year to tell us why prices rose or fell after the fact, are paraded on CNBC to proclaim the huge consumer windfall from the drop in price. This is just another episode of a never ending reality show, designed to keep the average American sedated so they’ll continue to spend money they don’t have buying crap they don’t need. The brainless twits that pass for journalists in the corporate mainstream media never give the viewer or reader any historical context to judge the true impact of the price increase or decrease. The government agencies promoting the storyline of those in power extrapolate the current trend and ignore the basic facts of supply, demand, price and peak oil. The EIA is now predicting further drops in prices. Two months ago they predicted steadily rising prices through the summer. What would we do without these government drones guiding us?

Inflation Adjusted Gasoline Prices (Monthly)

As you can see from the chart, gas prices tend to be volatile and unpredictable in the short term. You can also see that since 1998 the trend has been relentlessly higher. The average inflation adjusted price of gasoline in 1998 was $1.41 per gallon, versus $3.55 today, a 152% increase in fourteen years. Over this same time frame the BLS manipulated CPI was up only 44%. If we are swimming in oil, as the MSM pundits claim, why the tremendous surge in price? It must be those evil oil companies. It couldn’t possibly be the impact of peak oil. To acknowledge the fact that worldwide oil production has reached its peak would be to concede that our suburban sprawl, just in time world is drawing to an excruciating end. So the politicians spout their assigned storylines, supported by their paid off “experts” (aka Daniel Yergin), and unquestioningly reported as fact by their designated corporate media outlet. Those of a liberal bent assail oil companies and speculators; refuse to acknowledge the law of supply and demand, while touting green energy as the solution to all our energy needs. Those of a conservative bent believe in attacking foreign countries to secure “our” oil, refuse to acknowledge the law of supply and demand, and spout “drill, drill, drill” slogans because dealing with facts is inconvenient. The willfully ignorant public believes whichever storyline matches their preconceived beliefs. All is well – no one is required to think critically. Thinking is hard.

There are numerous factors that affect the price of oil on a daily basis, but at the end of the day supply and demand determine price. The chart below documents the key external events that have had a major impact on oil prices since 1970. The vital fact that you won’t hear on CNBC is that every recession since 1970 has been immediately preceded by an oil price spike. Anyone living in the real world (this excludes Cramer, Liesman, Bartiromo, & Kudlow) knows we have entered part two of the Greater Depression. The surge in oil prices in the last two years has precipitated this renewed downturn.

The MSM blathering baboons of bullshit dutifully report the price of gas on a given day. People who live in the real world fill up their gas tanks every week, so the average price over a period of time is what matters. The average price of a gallon of gasoline in 2008 was $3.39. The average price in 2011 was $3.48. The average price in 2012 has been $3.62 thus far. This data paints an entirely different picture than the one painted by the politicians, experts and the clueless captured media. Gas prices are higher than they were prior to the last economic implosion. Cause and effect is a concept beyond the intellectual capabilities of MSM journalists and the millions of government educated zombies they mesmerize with misinformation. The lack of intellectual curiosity and critical thinking skills plays directly into the hands of those with a storyline to sell or truth to obscure.

Swimming in Oil

The recent storyline proliferated by the MSM at the behest of Washington DC politicians and the corporate interests that control them, is that the U.S. is on the verge of energy independence, with hundreds of years of plentiful oil right under our feet. The chart below made the rounds last week on Bloomberg, defender and mouthpiece of billionaires everywhere. This chart surely proves that peak oil is bullshit. Right?

Besides the false representation of oil production and the misleading conclusion that we have more oil than we need, the chart and Bloomberg screed does not provide the true context of why worldwide demand is tumbling. The chart is NOT showing global crude oil production. It is showing global oil and other liquids supply, which includes crude and condensate, natural gas plant liquids, other liquids (mostly ethanol), and processing gains (increase in volume from refining heavy oil). The MSM would rather mislead the public than provide the true picture of the supposed oil production boom. The question is whether the MSM is misleading the public due to their own journalistic incompetence or are they carrying out their assigned mission on behalf of the corporate oligarchs running the kingdom.

The chart below reveals a truer picture of the worldwide energy situation. Conventional oil production hit its peak/plateau around 74 million barrels per day at the end of 2004, and has barely budged from that level over the last eight years. Despite all the rhetoric about the North American oil boom, conventional oil production is at virtually the same level today as it was in 2004. The U.S.(shale oil) and Canadian (tar sands) gains in production have been matched by the collapse in Mexican production. The Middle East countries produced 23.3 million barrels in September 2004. The average price of a barrel of oil in 2004 was $38. They are now only producing 23.9 million barrels when prices are 120% higher.

World Oil and Other Liquids Supply

Global oil demand in 2004 was around 84 million barrels per day. To increase liquid fuel supply to meet the 90 million barrels per day demand we had to turn to unconventional fuels like tar sands, tight oil, and biofuels, all of which have far higher production costs and far less energy content than sweet crude. As the easy to access, cheap to produce ($20 per barrel in Saudi Arabia), close to the surface sweet crude has been depleted, it has been replaced by heavy crude, tar sands, deep-water oil, and shale oil, with production costs in excess of $80 per barrel. Anyone anticipating a long-term decline in fuel prices must be smoking tar sands in their bong. The liquids that have “replaced” conventional crude have a few slight drawbacks. Natural gas liquids provide about 70% as much energy per barrel as crude oil, so a barrel of NGL is not equivalent to a barrel of crude. Have you filled up your SUV lately with some NGL? Ethanol provides only 60% as much energy per barrel as crude oil and its EROEI is pitifully low. The energy returned on energy invested for these non-conventional sources of energy approaches the minimum limits unless prices rise dramatically. The Obama green army does not want this chart making its way into the public discourse. Their fantasyland of renewable energy solutions is proven to be a fool’s errand.

Catch-22 Energy Edition

The price of a barrel of West Texas crude is currently $86 per barrel, down from $109 per barrel in February. Obama supporters will proclaim that his threat to crack down on speculators had the desired effect. He must have scared those nasty speculators with his gravitas. The price rise surely didn’t have anything to do with the U.S. led attack on Libya, the act of war economic sanctions on Iran, the beating of Israel/U.S. war drums, Japan demand due to the shutdown of their nuclear power industry, or the relentlessly higher demand from China and India. And now the MSM is trying to spin a yarn that prices have dropped by 21% because worldwide supply is surging. That is so much more palatable than telling the truth and admitting that we’ve entered the 2nd phase of the Greater Depression.

It took $140 a barrel in oil in 2008 to tip the world into recession. Worldwide economies were much stronger then. The U.S. National Debt has risen by $6.5 trillion, or 70% since 2008. Real GDP has risen by $200 billion since 2008, or a 1.5% increase. Debt to GDP has risen from 64% to 102%. Consumer debt at $2.55 trillion is exactly the same as the 2008 level even after Wall Street banks have written off over $1 trillion, subsidized by the American taxpayer. The consumer deleveraging storyline is completely false. In 2008 there were 234 million working age Americans and 145 million of them were employed. Today there are 243 million working age Americans and 142 million of them are employed. In 2008 there were 28 million Americans in the food stamp program. Today there are 46 million Americans collecting food stamps. The economic situation in Europe has deteriorated at a far greater rate. Therefore, it is not surprising that it only took $109 a barrel oil to push the world back into recession.

The main reason prices are dropping is the collapse in demand from Europe and the United States. The bumpy plateau of peak oil is in full force. Prices rise to the point where they push economies into recession, demand crashes due to the recession, and prices decline. The double whammy of oil prices reaching $111 a barrel in 2011 and $109 a barrel in 2012 have sapped the life out of the American consumer. This is reflected in the plunge in gasoline and petroleum usage since 2008, with a temporary leveling off in 2010, followed by a further nosedive since 2011. As this recession deepens over the next six months, prices will likely fall further. But this is where the Catch-22 kicks in.

Once prices drop below $80 a barrel it sets in motion a reduction in capital investment, as new production projects are not economically feasible below $80 per barrel. Oil analyst Chris Nedler explains the Catch-22 aspect of oil prices in a recent article:

Research by veteran petroleum economist Chris Skrebowski, along with analysts Steven Kopits and Robert Hirsch, details the new costs: $40 – $80 a barrel for a new barrel of production capacity in some OPEC countries; $70 – $90 a barrel for the Canadian tar sands and heavy oil from Venezuela’s Orinoco belt; and $70 – $80 a barrel for deep-water oil. Various sources suggest that a price of at least $80 is needed to sustain U.S. tight oil production.

Those are just the production costs, however. In order to pacify its population during the Arab Spring and pay for significant new infrastructure projects, Saudi Arabia has made enormous financial commitments in the past several years. The kingdom really needs $90 – $100 a barrel now to balance its budget. Other major exporters like Venezuela and Russia have similar budget-driven incentives to keep prices high.

Globally, Skrebowski estimates that it costs $80 – $110 to bring a new barrel of production capacity online. Research from IEA and others shows that the more marginal liquids like Arctic oil, gas-to-liquids, coal-to-liquids, and biofuels are toward the top end of that range.

My own research suggests that $85 is really the comfortable global minimum. That’s the price now needed to break even in the Canadian tar sands, and it also seems to be roughly the level at which banks and major exploration companies are willing to commit the billions of dollars it takes to develop new projects.

Oil prices may temporarily drop below $80, but prices below that level for a prolonged period will lead to supply being constricted, which will ultimately lead to higher prices. The storyline of hundreds of years of Bakken shale oil that will make the U.S. energy independent is the latest fiction to be peddled by the oligarchs as a way to sedate and confuse the masses.

What the Frack

U.S. oil production in 2007 averaged 8.5 million barrels per day. Today, the U.S. is producing 10.7 million barrels per day. We must have hit the jackpot. Not quite. Actual crude oil production has increased by 1 million barrels per day, a 20% increase. The other 1.2 million barrels have been from liquefied natural gas (up 34%) and government subsidized ethanol (up 100%).

The U.S. crude oil production is at the same level it was in 1998, but somehow we are on the verge of becoming energy independent. The recent increase is solely due to the horizontal drilling and hydraulic fracturing of shale deposits in Texas and North Dakota. You don’t hear much about Alaskan production declining for the ninth year in a row and California production declining to the lowest level in three decades. The paid shills predicting Bakken production of 3 million barrels per day are purposely lying or just plain delusional.

North Dakota oil production has reached 550,000 barrels per day versus 187,000 barrels per day in 2009. Simpletons in the MSM will just extrapolate this growth to 3 million barrels by 2020. No need to examine the facts. Oil market expert Tom Whipple reveals the dirty secrets behind the Bakken shale oil miracle:

It took the production from 6,617 wells to produce North Dakota’s 546,000 b/d in January. Divide the daily production by the number of wells and you get an astoundingly low 82 b/d from each well. I say “astounding” because a good new offshore well can do 50,000 b/d. BP’s Macondo well which exploded in the Gulf a couple of years ago was pumping out an estimated 53,000 b/d before it was capped.

Now a North Dakota shale oil well is not in the cost class of a deep-water offshore platform which can run into the billions, but they do cost about three times as much as a classic onshore oil well as they first must be drilled down 11,000 feet and then 10,000 horizontally through the oil bearing layer before the fracturing of the rock can take place. The “fracking” involves at least 15 massive pumps that inject water and other chemicals into the well. Take a Google Earth flight over northwestern North Dakota. The fracked wells are hard to miss as there are now about 9,000 of them and they are each the size of a football field.

There is still more — fracked wells don’t keep producing very long. Although a few newly fracked wells may start out producing in the vicinity of 1,000 barrels a day, this rate usually falls by 65 percent the first year; 35 percent the second; and another 15 percent the third. Within a few years most wells are producing in the vicinity of 100 b/d or less which is why the state average for January is only 82 b/d despite the addition of 1300 new wells in 2011.

The rapid depletion of these wells, enormous expense to drill new wells, oil prices barely above cost of production, low EROEI, swiftly falling Alaskan and shallow water production, and the snail’s pace of deep water production are not a recipe for energy independence. Shale oil production will never exceed 1 million barrels per day. And if you believe Saudi Arabia’s promises to fulfill any shortfalls, I’ve got some delightful beachfront property in Afghanistan to sell you. Saudi conventional crude oil production is at the same level it was in 2005.

Saudi Arabia Oil Production

The seven year Saudi plateau is just a precursor to what is going to happen over the next decade. Saudi Arabia began pumping oil in 1945. It will all be gone by 2045. You can’t extract an infinite amount of oil from a finite world. Pretending this isn’t true won’t make it so. Oil has been the lifeblood of our nation since the late 1800s. The depletion of this essential ingredient of the modern world will not lead to a sudden death for our way of life but a slow downward spiral of waning supply, escalating prices, and economic decay.

The sustained high and rising oil prices will be economically destructive as our debt saturated, suburban sprawl, mall centric, SUV crazed, cheap oil dependent society methodically and agonizingly implodes. Chris Skrebowski describes our future succinctly:

“Unless and until adaptive responses are large and fast enough to constrain the upward trend of oil prices, the primary adaptive response will be periodic economic crashes of a magnitude that depresses oil consumption and oil prices.”

We’ve entered one of these periodic economic crashes. They are coming faster and faster. So enjoy that 40 cent drop in gas prices as you drive down to sign up for food stamps. The Saudis have a saying that acknowledges their luck in being born on top of billions of barrels of oil and the inevitability of its depletion:

“My father rode a camel, I drive a car, my son flies a jet plane, his son will ride a camel.”   

Delusional Americans believe they have a right to cheap plentiful oil forever. They refuse to acknowledge that luck has played the major part in their rise to economic power. The American saying will be:

My great grandfather rode a horse, my grandfather drove a Model T, my father drove a Buick, I leased a Cadillac Escalade, my son died in the Middle East fighting for my oil, his son will never be born.  

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