Fracking Is Alive and Well

Big hat tip to Wall Street Journal’s energy reporter Erin Ailworth, from whose article I borrowed heavily to write this post. She is based in Houston, and her full article can be viewed on the link below.
Fracking 2.0: Shale Drillers Pioneer New Ways to … – Wall Street Journal

A few years ago, when the global market on oil prices started to head south from over a $100 a barrel, the administrator, Sir James Quinn (who received his knighthood from the Irish owner of a pub in Wildwood NJ, heh) of this distinguished site and I got into an animated discussion about fracking for oil and natural gas. It was fun, mainly because I beat on him like a rented mule while arguing that fracking was good for America’s independence from foreign sources of oil, and Sir James argued that market forces on the decreasing price of oil would eventually destroy those energy industries heavily involved and heavily indebted in fracking for oil in America. Our discussion occurred when I believe oil had tanked to around $60 a barrel.

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Natural Gas Prices Should Double

Gasoline prices are already up 30% from their lows in a matter of weeks. That’s how fast things can change in the real world. As more and more oil companies tied to oil and natural gas fracking declare bankruptcy in 2016/2017, the over supply will disappear and prices will rise. Art uses facts to predict natural gas prices will double in the next twelve months.

Luckily, none of us use gasoline for our cars or natural gas for heat and cooking. So, the 30% to 100% increase in these costs won’t effect that CPI number that Yellen keeps telling us is too low. As even the fake BLS inflation numbers jump above 3%, old lady Yellen will say it’s temporary and not raise rates again. So it goes.

 

Guest Post by Art Berman

Natural gas prices should double over the next year.

Over-supply plus a warm 2015-2016 winter have resulted in low gas prices. That is about to change because supply is decreasing (Figure 1).

Supply Balance_STEO_JAN 2016 Natural Gas 24 Jan 2016

Figure 1. EIA U.S. natural gas supply balance and forecast. Production, consumption and supply balance values are 12-month moving averages. Source: EIA and Labyrinth Consulting Services, Inc.

Total supply–dry gas production plus net imports–has been declining since October 2015* because gas production is flat, imports are decreasing and exports are increasing. Shale gas production has stopped growing and conventional gas has been declining for the past 15 years. As a result, the supply surplus that has existed since December 2014 is disappearing and will move into deficit by November 2016 according to data in the EIA March STEO (Short Term Energy Outlook) .

During the last supply deficit from December 2012 to November 2014, Henry Hub spot prices averaged $4.05 per mmBtu. Prices averaged $1.99 per mmBtu in the first quarter of 2016 so it is reasonable that prices may double during the next period of deficit.

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In Biggest Victory For Saudi Arabia, North Dakota’s Largest Oil Producer Suspends All Fracking

But, but, but Wall Street shysters, CNBC, and dozens of oil company cheerleaders all told me shale oil was still profitable at $30 a barrel. WTF??? Why would the biggest Bakken fracker stop fracking? Was someone telling fibs? Those Wall Street and MSM jokesters!!!

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Yesterday, during his speech at CERAWeek in Houston, Saudi oil minister Ali al-Naimi made it explicitly clear that Saudi Arabia would not cut production, instead saying that it is high-cost producers that would need to either “lower costs, borrow cash or liquidate” adding that there is “no need for cuts as marginal barrel will get out of the market.” He was right.

Today his wish is slowly coming true after news that North Dakota’s largest producer, Whiting Petroleum, would suspend all fracking, and that Continental Resources has effectively done the same after reporting that it no longer has any fracking crews working in the Bakken shale.

As Reuters reports, Whiting said it would “suspend all fracking and spend 80 percent less this year, the biggest cutback to date by a major U.S. shale company reacting to the plunge in crude prices.”

It was also confirmation that the Saudi plan to put high-cost producers on ice is working, if only temporarily.

After sliding 5.6% to $3.72, Whiting stock jumped 8% to over $4 per share in after-hours trading as investors cheered the decision to preserve capital, even if it means generating far less revenue.

Whiting’s cut is one of the largest so far this year in an energy industry crippled by oil prices at 10-year lows. The cuts will have a big impact in North Dakota, where Whiting is the largest producer.The Denver-based company said it would stop fracking and completing wells as of April 1. Most of its $500 million budget will be spent to mothball drilling and fracking operations in the first half of the year. After June, Whiting said it plans to spend only $160 million, mostly on maintenance.

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Funds For Fracking Finally Dry Up: One Last Hail Mary Pass Remains

Shale oil trades at a $13 discount to WTI. I wonder how many frackers can stay in business getting $29 for a barrel of their oil? They weren’t making profits at $100 per barrel. This is going to be an epic collapse. Wall Street is about to take it up the yazoo. The defaults, bankruptcies, and layoffs will be huge. So solly. The shale oil miracle was nothing but a debt financed Ponzi scheme.

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Is Saudi Arabia on the verge of winning the war on US Shale firms? It appears the spigot of malinvestment-subsidizing liquidity that kept numerous zombie energy firms alive has been shut off almost entirely. As oil prices return to cycle lows, so credit risk has spiked to record highs and issuance of life-giving bonds has collapsed. As Reuters reports, this has opened up opportunities for deep-pocketed private equity firms to push for restructuring or buy assets as many oil companies need cash to replenish banks’ slimmed-down lending facilities, service their bonds and finance drilling of new wells to keep pumping oil and sustain cash flow.

 

Credit risk has soared back to record levels…

 

As public market demand for this sector has collapsed…

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SSS SCHOOLS ADMIN ON FRACKING

Good news for frackers.

In mid-May 2015, domestic oil production increased by 300,000 bbl/day over the past 3 months to a grand total of 9.6 million bbl/day. This total domestic production is the highest it’s been since 1970, when domestic oil production started a long, 35 year slide to just under 5 million bbl/day in 2005.

In the 10 years since, the U.S. has added over 4.6 million bbl/day to its production, and fracking has accounted for 90% of that increase. For the math challenged, that’s 4.14 million bbl/day.

So why is domestic oil production increasing when so many predicted a death knell for the fracking industry as the global PRICE of oil plummeted from $110 a barrel to its current level of $60. It’s because the fracking companies still standing can profit from $60 a barrel and not the “conventional wisdom” that they need the global price of oil to remain at or above $80-85 a barrel. Several factors are in play.

—-Half of the NEW fracking wells started in September 2014 have been idled. Lower cost to the companies in energy consumed, equipment purchased or leased, and jobs required.

—-100,000 workers laid off. Huge savings to the companies in labor costs.

—-Less productive wells idled. Production at the best wells ramped up. Yes, this will deplete these wells even faster, but the companies have already identified promising replacements through …….

—-Skyrocketing technology in horizontal drilling, which can now burrow its way through the earth up to 15,000 feet using seismic imaging and a host of other breakthroughs to find what they’re looking for: huge amounts of recoverable oil. And the technology is working very, very well.

—-Bankruptcies. Sorry about the jobs lost or idled, but that’s how destructive capitalism works. The companies left standing are snapping up oil leases and idled equipment at fire sale prices, and …..

—-Institutional investors are watching closely. And they like what they see and have poured over $20 billion into the fracking companies in the past few months. This is precisely the OPPOSITE of what occurred in 1986 when the domestic oil industry collapsed and the banks and investors stampeded to the exits.

—-Finally, a coup de grace has been delivered to the radical environmental groups who have been fighting fracking for years based on spurious allegations that fracking threatens under ground water sources. Two days ago, the EPA released a multi-year study costing nearly $50 million dollars that it does not. The EPA study did not reveal ONE SINGLE INSTANCE of fracking fluids which compromised under ground water. Not one.

Fracking for oil is safe and critical to the economy and national security. Critical. I challenge the anti-frackers who have read these comments to present any case which refutes my analysis and firm support of the fracking industry. It will survive, and it will prosper. Greatly to the nation’s and individual’s benefit.

And I invite Admin to go first.


Half Of US Frackers Will Be Dead By Year End, Weatherford Warns

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Following the CEO’s comments that over 100,000 energy jobs will be lost this year, an executive with Weatherford International – the fifth largest US fracker – has warned half of the 41 fracking companies operating in the U.S. will be dead or sold by year-end because of slashed spending by oil companies. “We go by and we see yards are locked up and the doors are closed,” said Rob Fulks, seemingly confirming what Weatherford CEO Duroc-Danner said earlier in the year, “we’re now confronted with an unusually severe market contraction.”

 

As Bloomberg reports, there were 61 fracking service providers in the U.S., the world’s largest market, at the start of last year. Now there are 41… and it’s going to get a lot less…

Half of the 41 fracking companies operating in the U.S. will be dead or sold by year-end because of slashed spending by oil companies, an executive with Weatherford International Plc said.

 

There could be about 20 companies left that provide hydraulic fracturing services, Rob Fulks, pressure pumping marketing director at Weatherford, said in an interview Wednesday at the IHS CERAWeek conference in Houston. Demand for fracking, a production method that along with horizontal drilling spurred a boom in U.S. oil and natural gas output, has declined as customers leave wells uncompleted because of low prices.

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USGS Confirms Oklahoma Quakes Are Due To Fracking

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The debate about the cause of the exponential rise in the frequency of earthquakes in Oklahoma has really heated up in the last year, but as KFOR4 reports, The United States Geological Survey (USGS) appears to have put any doubt firmly to rest. In a strongly-worded press release, the USGS states, “…Large areas of the United States that used to experience few or no earthquakes have, in recent years, experienced a remarkable increase in earthquake activity.. This rise in seismic activity, especially in the central United States, is not the result of natural processes... Instead, the increased seismicity is due to fluid injection associated with new technologies that enable the extraction of oil and gas from previously unproductive reservoirs.” For some, that could end the debate; but Kim Hatfield, with the Oklahoma Independent Petroleum Association, is not so sure, “I don’t think it’s particularly helpful because basically, it says we’ve come to a conclusion, but we don’t have the science to back it up.”

 

Full USGS Statement: Coping with Earthquakes Induced by Fluid Injection

A paper published today in Science provides a case for increasing transparency and data collection to enable strategies for mitigating the effects of human-induced earthquakes caused by wastewater injection associated with oil and gas production in the United States.  The paper is the result of a series of workshops led by scientists at the U.S. Geological Survey in collaboration with the University of Colorado, Oklahoma Geological Survey and Lawrence Berkeley National Laboratory, suggests that it is possible to reduce the hazard of induced seismicity through management of injection activities.

 

Large areas of the United States that used to experience few or no earthquakes have, in recent years, experienced a remarkable increase in earthquake activity that has caused considerable public concern as well as damage to structures. This rise in seismic activity, especially in the central United States, is not the result of natural processes.

 

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The Pros And Cons Of Fracking

Gas prices are plummeting across America thanks in part to the country doubling its daily oil exports, which is made possible by chemical fracturing technology that scientists have said wreaks havoc on the environment. Here are some pros and cons of fracking:

Pros

  • Blasts tens of thousands of gallons of chemicals deep underground, out of harm’s way
  • Prompts important conversation about whether or not people have a right to clean water
  • Chemical balance of breathable air getting a little staid
  • Fact that shale well blowout could happen at any moment emphasizes ephemeral beauty of life
  • Cancer research could use few more confounding variables
  • Those hardest hit will be the voiceless

Cons

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3 Billion Gallons Of Fracking Wastewater Pumped Into Clean California Aquifiers: “Errors Were Made” State Admits

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Dear California readers: if you drank tapwater this morning (or at any point in the past few weeks/months), you may be in luck as you no longer need to buy oil to lubricate your engine: just use your blood, and think of the cost-savings. That’s the good news.

Also, the bad news, because as the California’s Department of Conservation’s Chief Deputy Director, Jason Marshall, told NBC Bay Area, California state officials allowed oil and gas companies to pump up to 3 billion gallons (call it 70 million barrels) of oil fracking-contaminated waste water into formerly clean aquifiers, aquifiers which at least on paper are supposed to be off-limits to that kind of activity, and are protected by the government’s EPA – an agency which, it appears, was richly compensated by the same oil and gas companies to look elsewhere.

And the scariest words of admission one can ever hear from a government apparatchik: “In multiple different places of the permitting process an error could have been made.”

Because nothing short of a full-blown disaster prompts the use of the dreaded passive voice. And what was unsaid is that the “biggest error that was made” is that someone caught California regulators screwing over the taxpayers just so a few oil majors could save their shareholders a few billion dollars in overhead fees.

And now that one government agency has been caught flaunting the rules, the other government agencies, and certainly private citizens and businesses, start screaming: after all some faith in the well-greased, pardon the pun, government apparatus has to remain:

“It’s inexcusable,” said Hollin Kretzmann, at the Center for Biological Diversity in San Francisco. “At (a) time when California is experiencing one of the worst droughts in history, we’re allowing oil companies to contaminate what could otherwise be very useful ground water resources for irrigation and for drinking. It’s possible these aquifers are now contaminated irreparably.”

The process, for those confused, explained by NBC:

In “fracking” or hydraulic fracturing operations, oil and gas companies use massive amounts of water to force the release of underground fossil fuels. The practice produces large amounts of waste water that must then be disposed of.

 

Marshall said that often times, oil and gas companies simply re-inject that waste water back deep underground where the oil extraction took place. But other times, Marshall said, the waste water is re-injected into aquifers closer to the surface. Those injections are supposed to go into aquifers that the EPA calls “exempt”—in other words, not clean enough for humans to drink or use.

 

But in the State’s letter to the EPA, officials admit that in at least nine waste water injection wells, the waste water was injected into “non-exempt” or clean aquifers containing high quality water.

 

For the EPA, “non-exempt” aquifers are underground bodies of water that are “containing high quality water” that can be used by humans to drink, water animals or irrigate crops.

 

If the waste water re-injection well “went into a non-exempt aquifer. It should not have been permitted,” said Marshall.

Yet it was, to the tune of 3 billion gallons. And nobody said a word about it until someone finally did a little research and found that people, especially those in power, lie.

And lie they did because the severity of the pollution is only now becoming clear:

In its reply letter to the EPA, California’s Water Resources Control Board said its “staff identified 108 water supply wells located within a one-mile radius of seven…injection wells” and that The Central Valley Water Board conducted sampling of “eight water supply wells in the vicinity of some of these… wells.”

 

“This is something that is going to slowly contaminate everything we know around here,” said fourth- generation Kern County almond grower Tom Frantz, who lives down the road from several of the injection wells in question.

 

According to state records, as many as 40 water supply wells, including domestic drinking wells, are located within one mile of a single well that’s been injecting into non-exempt aquifers.

 

That well is located in an area with several homes nearby, right in the middle of a citrus grove southeast of Bakersfield.

 

Cue the just as angry community organizers:

“That’s a huge concern and communities who rely on water supply wells near these injection wells have a lot of reason to be concerned that they’re finding high levels of arsenic and thallium and other chemicals nearby where these injection wells have been allowed to operate,” said Kretzmann.

 

“It is a clear worry,” said Juan Flores, a Kern County community organizer for the Center on Race, Poverty and The Environment. “We’re in a drought. The worst drought we’ve seen in decades. Probably the worst in the history of agriculture in California.”

 

“No one from this community will drink from the water from out of their well,” said Flores. “The people are worried. They’re scared.”

It remains to be seen just whom that other, far more prominent community organizer will blame for this latest environmental debacle. Surely it will somehow be the fault of the Keystone pipeline?

In the meantime, the oil companies are already taking defensive measures, blaming the fiasco on… a “paperwork issue.”

The trade association that represents many of California’s oil and gas companies says the water-injection is a “paperwork issue.” In a statement issued to NBC Bay Area, Western States Petroleum Association spokesman Tupper Hull said “there has never been a bona vide claim or evidence presented that the paperwork confusion resulted in any contamination of drinking supplies near the disputed injection wells.”

Well, actually, there is:

However, state officials tested 8 water supply wells within a one-mile radius of some of those wells.

 

Four water samples came back with higher than allowable levels of nitrate, arsenic, and thallium.

 

Those same chemicals are used by the oil and gas industry in the hydraulic fracturing process and can be found in oil recovery waste-water.

And now back to the source of it all: the California Department of Conservation, where we are confident a little further investigative reporting will find millions in kickbacks and corruption, all funded by the oil and gas “lobby.”

When asked how this could happen in the first place, Marshall said that the long history of these wells makes it difficult to know exactly what the thinking was.

 

“When you’re talking about wells that were permitted in 1985 to 1992, we’ve tried to go back and talk to some of the permitting engineers,” said Marshall. “And it’s unfortunate but in some cases they (the permitting engineers) are deceased.”

 

Kern County’s Water Board referred the Investigative Unit to the state for comment.

We hope to learn who the state will refer the unit for comment next.

Finally, for those living around the blue dots, avoiding the tapwater for the time being may be a good idea.

As for whether the public’s opinion about fracking is changed as a result of revelations such as this: we reserve judgment until comparative Investigative Units piece uncover how many billion gallons in fracking wastewater was dumped in other states where the shale miracle is (still) alive and well.

FRACKED UP

There is no doubt that fracking stopped the long-term decline in U.S. oil output. Since the all-time low output in 2006, daily oil production has increased by 30%. Natural gas production has soared even higher, but seems to have leveled off. Ignoring the environmental impacts of fracking, just the economics alone show that shale oil and gas are not the miracle that will save us from the perils of peak cheap oil. Fracking extraction of oil is extremely expensive. If oil prices were to fall to $80 per barrel, there would be no profits for frackers. They would stop drilling wells. So don’t plan on ever paying less than $3 per gallon for gasoline ever again.

Other inconvenient truths about fracking are self evident, but covered up by the MSM and Wall Street shysters.

  • To maintain production of 1 million barrels of oil a day from Iraq one needs to drill just 60 new wells a year. Extracting the same amount from the Bakken would require 2,500 new wells.
  • A typical fracked well poked in the ground in Oklahoma in 2009 debuted with an output of about 1,200 barrels of oil per day. Just four years later, however, output from the same well has fallen to just 100 barrels of oil per day.
  • To double that output from the Bakken, for instance, would require 5,200 new wells a year, and tripling it would require 7,800 and so on. Then, to the horror of all, less than a decade after all that was done, that additional million barrels of oil a day in production would be reduced to just 100,000, no matter what the oil companies do, because of the nature of the formation where the well was drilled.
  • California’s Monterey Shale, which the U.S. Energy Information Agency thought contained 13.7 billion barrels of oil in 2011, came up a little light in the loafers. Closer examination revealed the formation to be much more broken up underground than previously thought — so much so that only around 600 million barrels may ultimately be recovered with current technology. That’s a 97 percent downgrade, and there is no guarantee that other rosy predictions of shale oil riches both in the U.S. and elsewhere won’t have similar outcomes.

The best fracking locations were selected first. As time goes on, the new locations will be less productive. The existing locations deplete rapidly. The shale oil and gas boom will be peaking out over the next few years. Don’t believe in miracles.

Infographic: The Oil and Gas Industry in the United States | Statista

You will find more statistics at Statista

ENERGY INDEPENDENCE – THE BIG LIE

 

 PRICE OF A BARREL OF OIL 1978 – $14.00

“We are the generation that will win the war on the energy problem and in that process, rebuild the unity and confidence of America.” – President Jimmy Carter, 1979

“We have it in our power to act right here, right now. I propose $6 billion in tax cuts and research and developments to encourage innovation, renewable energy, fuel-efficient cars, and energy-efficient homes.” – President Bill Clinton, 1998

“I think that in ten years, we can reduce our dependence so that we no longer have to import oil from the Middle East or Venezuela. I think that’s about a realistic time frame…That’s why I’ve focused on putting resources into solar, wind, biodiesel, geothermal. These have been priorities of mine since I got to the Senate, and it is absolutely critical that we develop a high fuel efficient car that’s built not in Japan and not in South Korea, but built here in the United States of America.” – President Barack Obama, 2008

“We don’t have to wait on OPEC anymore. We don’t have to let them hold us hostage. America’s got the energy. Let’s have American energy independence.”- Rick Perry, CNN Debate, October 18

“We must become independent from foreign sources of oil. This will mean a combination of efforts related to conservation and efficiency measures, developing alternative sources of energy like biodiesel, ethanol, nuclear, and coal gasification, and finding more domestic sources of oil such as in ANWR or the Outer Continental Shelf (OCS).”Mitt Romney  

PRICE OF A BARREL OF BRENT OIL 2011 – $114.00

 

It is too bad that our 255 million cars can’t run on hot air. American presidents have propagated the Big Lie of energy independence for the last three decades. The Democrats have lied about green energy solutions and the Republicans have lied about domestic sources saving the day. These deceitful politicians put the country at risk as they misinform and mislead the non-thinking American public. They have been declaring our energy independence for 30 years, but we import three times as much oil today as we did in the early 1980’s. The CPI has gone up 350% since 1978, but the price of a barrel of oil has risen 800% over the same time frame. Today, I hear the same mindless fabrications from politicians and pundits about our ability to become energy independent. Any critical thinking analysis of the hard facts reveals that the United States will grow increasingly dependent upon other countries to supply our energy needs from a dwindling and harder to access supply of oil and natural gas. The fantasy world of plug in cars, corn driven vehicles and solar energy running our manufacturing plants is a castle in the sky flight of imagination. The linear thinking academic crowd believes a technological miracle will save us, when it is evident technology fails without infinite quantities of cheap oil.

I know the chart below requires some time to grasp, but I’m sure the average American can take five minutes away from watching Jersey Shore, Dancing with the Stars, or the latest update of the Kardashian saga to understand why the propaganda about energy independence is nothing but falsehoods. You have U.S. energy demand by sector on the right and the energy source by fuel on the left. Total U.S. energy use is nearly 100 quadrillion Btu. In physical energy terms, 1 quad represents 172 million barrels of oil (8 to 9 days of U.S. oil use), 50 million tons of coal (enough to generate about 2% of annual U.S. electricity use), or 1 trillion cubic feet of natural gas (about 4% of annual U.S. natural gas use).  

Please note that 37% of our energy source is petroleum, which supplies 95% of the energy for our transportation sector. That means your car and the millions of 18 wheelers that deliver your food to your grocery stores and electronic gadgets to your Best Buy. You can’t fill up your SUV with coal, natural gas, nuclear energy or sunshine. Without the 7 billion barrels of oil we use every year, our just in time mall centric suburban sprawl society would come to a grinding halt. There is no substitute for cheap plentiful oil anywhere in sight. The government sponsored ethanol boondoggle has already driven food prices higher, while requiring more energy to produce than it generates. Only a government “solution” could raise food prices, reduce gas mileage, and bankrupt hundreds of companies in an effort to reduce our dependence on oil. Natural gas as a transportation fuel supplies 2% of our needs. The cost to retro-fit 160,000 service stations across the country to supply natural gas as a fuel for the non-existent natural gas automobiles would be a fool’s errand and take at least a decade to implement.   

    

The green energy Nazis despise coal and nuclear power, which account for 31% of our energy supply. They want to phase coal out. They aren’t too fond of fracking either, so there goes another 23% of our supply. You might be able to make out that itsy bitsy green circle with the 7% of our supply from renewable energy. And more than half of that energy is supplied by hydro power. Less than 2% of our energy needs are met by solar and wind. For some perspective, we need to use the equivalent of 17 billion barrels of oil per year to run our society and solar and wind supplies the equivalent energy of about 300 million barrels of that total. I think our green energy dreams will come up just a smidgen short of meeting our demands. Nothing can replace oil as the lifeblood of our culture and there is no domestic supply source which will eliminate or even reduce our dependence upon the 10 million barrels per day we import from foreign countries. There are some hard truths that are purposefully ignored by those who want to mislead the public about the grim consequences of peak cheap oil:

  • The earth is finite. The amount of oil within the crust of the earth is finite. As we drain 32 billion barrels of oil from the earth every year, there is less remaining within the earth. We have drained the cheapest and easiest to reach 1.4 trillion barrels from the earth since the mid 1800s. The remaining recoverable 1.4 trillion barrels will be expensive and hard to reach.
  • The United States has about 2% of the world’s proven oil and gas reserves, but consumes 22% of the world’s oil production and 27% of the world’s natural gas production.
  • Demand for oil will continue to rise no matter what the United States does, as the developing world consumption far outstrips U.S. consumption. Oil is fungible and will be sold to the highest bidder.
  • The concept of energy returned on energy invested (EROEI) is beyond the grasp of politicians and drill, drill, drill pundits. EROEI is the ratio of the amount of usable energy acquired from a particular energy resource to the amount of energy expended to obtain that energy resource. When the EROEI of a resource is less than or equal to one, that energy source becomes an “energy sink”, and can no longer be used as a primary source of energy. Once it requires 1.1 barrels of oil to obtain a barrel of oil, the gig is up.
  • There is a negative feedback loop that revolves around oil supply, oil price and economic growth. As demand continues to rise and supply is more difficult to access, prices will rise. Since oil is an essential ingredient in every aspect of our lives, once the price reaches $120 to $150 a barrel economic growth goes into reverse. Demand crashes and investment in new sources of energy dries up. Rinse and repeat.

Finite World

World oil production peaked in 2005 has been flat since then, despite a continuous stream of promises from Saudi Arabia that they are on the verge of increasing production. The chart below from the U.S. Energy Information Administration propagates the standard fabrications about energy supplies. Even though worldwide oil production has clearly peaked, the oil industry PR whores and government agencies continue to project substantial production growth in the future. The mainstream media trots out Daniel Yergin whenever it wants to calm the masses, despite his track record of being 100% wrong 100% of the time. The brilliance of his July, 2005 Op-Ed shines through:

“Prices around $60 a barrel, driven by high demand growth, are fueling the fear of imminent shortage — that the world is going to begin running out of oil in five or 10 years. This shortage, it is argued, will be amplified by the substantial and growing demand from two giants: China and India. There will be a large, unprecedented buildup of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day — from 85 million barrels per day to 101 million barrels a day — a 20 percent increase. Such growth over the next few years would relieve the current pressure on supply and demand.”

Oil production capacity has not grown by one barrel since Yergin wrote this propaganda piece. This is despite the fact that prices have almost doubled, which should have spurred production. The current energy independence false storyline – the Bakken Formation – has gone from production of 10,000 barrels per day in 2003 to 400,000 barrels per day now, while the hundreds of millions invested in developing the Canadian tar sands have increased production by 50% since 2005. Despite these substantial increases in output, worldwide production has remained flat as existing wells deplete at the same rate that new production is brought online.

 

The facts are there is approximately 1.4 trillion barrels of recoverable oil left in the crust of the earth. We currently suck 32 billion barrels per year out of the earth. This means we have 44 years of oil left, at current consumption levels. But we know demand is growing from the developing world. Taking this fact into consideration, we have between 35 and 40 years worth of recoverable oil left on the planet. That is not a long time. Additionally, the last 1.4 trillion barrels will much more difficult and costly to extract than the first 1.4 trillion barrels. The remaining oil is miles under the ocean floor, trapped in shale and tar sands, and in the arctic. Despite these hard facts, governmental agencies and politicians continue to paint a rosy picture about our energy future. I watched in stunned amazement last week as five bozos on the McLaughlin Group news program unanimously proclaimed the U.S. would become a net exporter of oil in the coming decade. Do these supposedly intelligent people not understand the basic economics of supply, demand and price?  

It seems the governmental organizations always paint the future in the most optimistic terms, despite all facts pointing to a contrary outcome. The EIA predicts with a straight face that oil production will rise to 110 million barrels per day, while the price of a barrel of oil remains in the current $100 to $125 per barrel range. Non-OPEC production has been in decline since 2004, but the EIA miraculously predicts a 15% increase in production over the next 25 years. OPEC production has been flat since 2005, but the EIA is confident their 50 year old oil fields will ramp up production by 25% in the next 25 years. Does the EIA consider whether OPEC even wants to increase production? It would appear that constrained supply and higher prices would be quite beneficial to the OPEC countries. And then of course there is the unconventional oil that is supposed to increase from 4 million barrels per day to 13 million barrels per day, a mere 325% increase with no upward impact on prices. These guys would make a BLS government drone blush with the utter ridiculousness of their predictions.

 

The picture below is an excellent representation of how the easy to access oil and gas of the earth have been tapped. They were close to the surface. The remaining oil and gas is deeper and trapped within shale and sand. The new technology for extracting gas from shale has concerns regarding whether fracking and disposal of waste water can be done safely, especially near highly populated areas. The relationship between fracking and earthquakes could also prove to be problematic. The wells also have rapid decline rates. Add a mile of ocean to the picture below and you have some really expensive to access oil and potential for disaster, as witnessed with the Deep Water Horizon.

 

The EIA projects natural gas supply to grow by 10% between now and 2035 due to a 300% increase in shale gas supply. It seems the EIA believes the fantasy of 8 Saudi Arabia’s in the Bakken formation of North Dakota and decades of gas within the Marcellus Shale. These fantasies have been peddled by the natural gas industry in order to get support for their fracking efforts. This false storyline is damaging to the long-term planning that should be taking place now to alleviate the energy scarcity that is our future. In 2006 the EIA reported the possibility of 500 billion barrels of oil in the Bakken formation, based on guesswork. The U.S. Geological Survey has since scaled this back ever so slightly to 3.65 billion barrels, which is six months of U.S. consumption. The deceptions peddled regarding Marcellus shale are also colliding with reality. The U.S. Geological Survey recently produced an estimate of Marcellus Shale resources, which will cause the EIA to reduce its estimate of shale gas reserves for the Marcellus Shale by 80%. The price of natural gas is currently $3.54 MMBtu, down from $13 a few years ago. Extracting natural gas from shale has high capital costs of land, drilling and completion. It is not economically feasible below $6 MMBtu.

 

Based on the known facts and a realistic view of the future, there will be less supply of oil and natural gas as time goes on. We can already see the impact of these facts today. Even though Europe and the U.S. are in recession, the price of oil continues to rise. The developing world continues to demand more oil and the supply is stagnant. Stunts like withdrawing oil from the Strategic Reserve are foolish and politically motivated. Is the world then running out of oil then? No, but any increase in future global oil production will be modestly incremental and production could be thrown off course by any number of possible events, from an Israeli attack on Iran to (another, but successful this time) al Qaida attack on Saudi Arabia’s Abqaiq oil refinery. Any forecast regarding future oil production and prices isn’t worth the paper it is written on unless consideration to wars, revolutions and terrorism are factored into the equation.

We Don’t Matter

Americans like to think we are the center of the universe. Those who propagate the misinformation about U.S. energy independence are clearly math challenged. The total proven oil reserves in the world total 1.4 trillion barrels and the United States has 22 billion barrels of that total, or 1.6% of the world’s oil. The U.S. burns 7 billion barrels per year, so we have enough oil to survive for three whole years. The U.S. consumes 22% of the world’s oil despite having 4.5% of the world’s population and less than 2% of the world’s oil. Do these facts lead you to the conclusion the United States will be exporting oil in the near future?

 

When you hear the pundits breathtakingly describe our vast natural gas resources you would think we are the dominant player in this market. Not quite. The United States has 4% of the world’s natural gas reserves. Predictably we consume 22% of the world’s natural gas. Russia controls 25% of the world’s natural gas reserves, with the Middle East countries controlling 40% of the world’s reserves. The pundits can hype our “vast” supplies of natural gas, but the facts clearly reveal it is nothing but hype.

  

The U.S. is consuming less oil than it was in 2005. U.S. consumption is not the crucial factor in determining the price of oil today and our consumption will matter even less in the future. Emerging market countries, led by China and India, will be the driving force in oil demand in the coming decades. According to the IEA, “Non-OECD [emerging markets] account for 90% of population growth, 70% of the increase in economic output and 90% of energy demand growth over the period from 2010 to 2035.”

 

This demand is being driven by the growth in vehicles in emerging markets. The U.S. market has reached a saturation point, but China, India and the rest of the world are just beginning their love affairs with the automobile. The accumulation of facts regarding both supply and demand should even convince the most brainless CNBC talking head that the price of oil will continue to rise. The 2008 peak price of $145 per barrel will not hold. The tried and true American method of ignoring problems until they reach crisis proportions will bite us in the ass once again.

 

Slippery Road Ahead

The concept of EROI is incomprehensible to the peak oil deniers. When Larry Kudlow or one of the other drill, drill, drill morons proclaims the vast amount of oil in North Dakota shale and in Alberta, Canada tar sands, they completely ignore the concept of EROI. Some estimates conclude there are 5 trillion barrels of oil left in the earth. But, only 1.4 trillion barrels are considered recoverable. This is because the other 3.6 trillion barrels would require the expenditure of more energy to retrieve than they can deliver. Therefore, it is not practical to extract. When oil was originally discovered, it took on average one barrel of oil to find, extract, and process about 100 barrels of oil. That ratio has declined steadily over the last century to about three barrels gained for one barrel used up in the U.S. and about ten for one in Saudi Arabia.

The chart below clearly shows the sources of energy which have the highest energy return for energy invested. I don’t think I’ve heard Obama or the Republican candidates calling for a national investment in hydro-power even though it is hugely efficient. The dreams of the green energy crowd are shattered by the fact that biodiesel, ethanol and solar require as much energy to create as they produce. Tar sands and shale oil aren’t much more energy efficient. It’s too bad Obama and his minions hate dirty coal, because has the best return on energy invested among all the practical sources.   

 File:EROI - Ratio of Energy Returned on Energy Invested - USA.svg

Worse than the peak oil deniers are those who pretend that oil isn’t really that important to our society. They declare that technology will save the day, when in reality technology can’t function without oil. Without plentiful cheap oil our technologically driven civilization crashes. We are addicted to oil. Americans consume petroleum products at a rate of three-and-a-half gallons of oil and more than 250 cubic feet of natural gas per day each.  You might be interested in a partial list of products that require petroleum to be produced.

Solvents Diesel fuel Motor Oil Bearing Grease
Ink Floor Wax Ballpoint Pens Football Cleats
Upholstery Sweaters Boats Insecticides
Bicycle Tires Sports Car Bodies Nail Polish Fishing lures
Dresses Tires Golf Bags Perfumes
Cassettes Dishwasher parts Tool Boxes Shoe Polish
Motorcycle Helmet Caulking Petroleum Jelly Transparent Tape
CD Player Faucet Washers Antiseptics Clothesline
Curtains Food Preservatives Basketballs Soap
Vitamin Capsules Antihistamines Purses Shoes
Dashboards Cortisone Deodorant Footballs
Putty Dyes Panty Hose Refrigerant
Percolators Life Jackets Rubbing Alcohol Linings
Skis TV Cabinets Shag Rugs Electrician’s Tape
Tool Racks Car Battery Cases Epoxy Paint
Mops Slacks Insect Repellent Oil Filters
Umbrellas Yarn Fertilizers Hair Coloring
Roofing Toilet Seats Fishing Rods Lipstick
Denture Adhesive Linoleum Ice Cube Trays Synthetic Rubber
Speakers Plastic Wood Electric Blankets Glycerin
Tennis Rackets Rubber Cement Fishing Boots Dice
Nylon Rope Candles Trash Bags House Paint
Water Pipes Hand Lotion Roller Skates Surf Boards
Shampoo Wheels Paint Rollers Shower Curtains
Guitar Strings Luggage Aspirin Safety Glasses
Antifreeze Football Helmets Awnings Eyeglasses
Clothes Toothbrushes Ice Chests Footballs
Combs CD’s & DVD’s Paint Brushes Detergents
Vaporizers Balloons Sun Glasses Tents
Heart Valves Crayons Parachutes Telephones
Enamel Pillows Dishes Cameras
Anesthetics Artificial Turf Artificial limbs Bandages
Dentures Model Cars Folding Doors Hair Curlers
Cold cream Movie film Soft Contact lenses Drinking Cups
Fan Belts Car Enamel Shaving Cream Ammonia
Refrigerators Golf Balls Toothpaste Gasoline

 

The propaganda blared at the impressionable willfully ignorant American public has worked wonders. The vast majority of Americans have no clue they have entered a world of energy scarcity, a world where the average person is poorer and barely able to afford the basic necessities of life. This is borne out in the vehicles sales statistics reported every month. There have been 10.5 million passenger vehicles sold through the first 10 months of 2011. In addition to the fact they are “purchased” using 95% debt and financed over seven years, the vast majority are low mileage vehicles getting less than 20 mpg. Only 1.8 million small energy efficient vehicles have been sold versus 6.1 million SUVs, pickup trucks and large luxury automobiles. Americans have the freedom to buy any vehicle they choose. They also have the freedom to not think and ignore the facts about the certainty of higher prices at the pump. By choosing a 20 mpg vehicle over a 40 mpg vehicle, they’ve sealed their fate. How could the average soccer mom get by without a Yukon or Excursion to shuttle Biff and Buffy to their games? Have you ever tried to navigate a soccer field parking lot in a hybrid? The horror!

The American public has been lulled back into a sense of security as gas prices have receded from $4.00 a gallon back to $3.40 a gallon. This lull will be short lived. Oil prices have surged by 15% in the last two months, even as the world economy heads into recession. The link between high oil prices and economic growth are undeniable, even though the deceitful pundits on CNBC will tell you otherwise. Ten out of eleven recessions since World War II were associated with oil price spikes. Gail Tverberg sums up the dilemma of energy scarcity for the average American:

“High-priced oil tends to choke economies because high oil prices are associated with high food prices (because oil products are used in food growing and transport), and people’s salaries do not rise to offset this rise in food and oil prices. People have to eat and to commute to their jobs, so they cut back on other expenditures. This leads to recession. Recession leads to lower oil consumption, since people without jobs can’t buy very much of anything, oil products included. In some sense, the reduction in oil extraction is due to reduced demand, because citizens cannot afford the high-priced oil that is available.”

But don’t worry. The rising oil and food prices will only impact the 99% in the U.S. and the poorest dregs across the globe that spend 70% of their income on food. The 1% will be just fine as they will bet on higher oil prices, therefore further enriching themselves while the peasants starve. The market for caviar, champagne, NYC penthouses, and summer mansions in the Hamptons will remain robust.

There is no escape from the ravages of higher priced oil. There is plenty of oil left in the ground. But, the remaining oil is difficult, slow and expensive to extract. Oil prices will rise because they have to. Without higher prices, who would make the huge capital investment required to extract the remaining oil? Once oil prices reach the $120 to $150 per barrel range our economy chokes and heads into recession. We are trapped in an endless feedback loop of doom. The false storyline of renewable energy saving the day is put to rest by Gail Tverberg:

“Renewables such as wind, solar PV, cellulosic ethanol, and biogas could more accurately be called “fossil fuel extenders” because they cannot exist apart from fossil fuels. Fossil fuels are required to make wind turbines and other devices, to transport the equipment, to make needed repairs, and to maintain the transport and electrical systems used by these fuels (such as maintaining transmission lines, running-back up power plants, and paving roads). If we lose fossil fuels, we can expect to lose the use of renewables, with a few exceptions, such as trees cut down locally, and burned for heat, and solar thermal used to heat hot water in containers on roofs.”

Predictably, the politicians and intellectual elite do the exact opposite of what needs to be done. We need to prepare our society to become more local. Without cheap plentiful oil our transportation system breaks down. Our 3.9 million miles of road networks will become a monument to stupidity as Obama and Congress want to spend hundreds of billions on road infrastructure that will slowly become obsolete. The crumbling infrastructure is already the result of government failure, as the money that should have been spent maintaining our roads, bridges and water systems was spent on train museums, turtle crossings, teaching South African men how to wash their genitalia, studies on the mating habits of ferrets, and thousands of other worthless Keynesian pork programs. If our society acted in a far sighted manner, we would be creating communities that could sustain themselves with local produce, local merchants, bike paths, walkable destinations, local light rail commuting, and local energy sources. The most logical energy source for the U.S. in an oil scarce scenario is electricity, since we have a substantial supply of coal and natural gas for the foreseeable future and the ability to build small nuclear power plants. The Fukushima disaster is likely to kill nuclear as an option until it is too late. The electrical grid should be the number one priority of our leaders, as it would be our only hope in an oil scarce world. Instead, our leaders will plow borrowed money into ethanol, solar, and shale oil drilling, guaranteeing a disastrous scenario for our country.

The United States is a country built upon the four C’s: Crude, Cars, Credit, and Consumption. They are intertwined and can’t exist without crude as the crucial ingredient. As the amount of crude available declines and the price rises, the other three C’s will breakdown. Our warped consumer driven economy collapses without the input of cheap plentiful oil. Those at the top levels of government realize this fact. It is not a coincidence that the War on Terror is the current cover story to keep our troops in the Middle East. It is not a coincidence the uncooperative rulers (Hussein, Gaddafi) of the countries with the 5th and 9th largest oil reserves on the planet have been dispatched. It is not a coincidence the saber rattling grows louder regarding the Iranian regime, as they sit atop 155 billion barrels of oil, the 4th largest reserves in the world. It should also be noted the troops leaving Iraq immediately began occupying Kuwait, owner of the 6th largest oil reserves on the planet. Oil under the South China Sea and in the arctic is being hotly pursued by the major world players. China and Russia are supporting Iran in their showdown with Israel and the U.S. As the world depletes the remaining oil, conflict and war are inevitable. The term Energy Independence will carry a different meaning than the one spouted by mindless politicians as the oil runs low.

And as things fell apart
Nobody paid much attention

Nothing but Flowers – The Talking Heads