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Those
inhabiting the economic wish-space got a case of the vapors last week when
the Paris-based International Energy Agency (IEA) published an annual report
stating that the USA would overtake Saudi Arabia as the world's leading oil
producer and reach the long-touted nirvana of "energy
independence." The news was greeted in this country with jubilation.
Thus, peak credulity meets peak bullshit.
It's
been clear for a while that authorities in many realms of endeavor -
politics, economics, business, media - are very eager to sustain the illusion
that we can keep our way of life chugging along. But under the management of
these elites, the divorce between truth and reality is nearly complete. The
financial system now runs entirely on accounting fraud. Government runs on
the fumes of statistical fraud. The business of oil and gas runs on public
relations fraud. And the media runs on the understandable wish of the masses
to believe that all the foregoing illusions still work to maintain the
familiar comforts of modern life (minus Hostess Ho-Hos and Twinkies, alas).
And
so the story has developed that the shale oil plays of North Dakota and
Texas, which started ramping up around 2005 - the same year the world hit the
wall of peak conventional oil - and the shale gas plays in Texas, Louisiana,
Pennsylvania, New York, and Ohio would enable American "consumers"
to drive to WalMart effectively forever.
Now,
it happens that the particulars of oil and gas production are so abstruse
that the editors of The New York Times, The Bloomberg News Service,
CNN, and a score of other mass media giants swallowed the IEA report whole,
with fanfares and fireworks, and a nation afflicted with doubt about its
future swooned into the first week of the holidays in celebration mode - we're
soon to be number 1 again, and the future is secure! Have a nice Thanksgiving
and Christmas and prepare to sober up in 2013. When the truth finally emerges
from this morass of dissimulation, the disappointment will be epic.
Here's
why the shale oil story is not the "game changer" that the wishful
claim it is: the price required to get it out of the ground (between $80-90 a
barrel) will crush the US economy. Since prices are already in that range,
the economy is already being crushed. The result is an economy in
more-or-less permanent contraction. As demand for oil falls with declining
economic activity the price of oil falls - below the level that makes it
worthwhile to conduct expensive shale oil drilling and fracking
operations.
Meanwhile,
in the background, as economies contract and economic "growth" of
the type our system requires no longer happens, the problems in finance and
banking get a lot worse. This is largely because interest on borrowed money
can no longer be paid back. Loans are defaulted on. As this happens, banks
become insolvent. Governments play games with public money - including
"money" they "create" out of thin air - to prop up the
banks. None of it alters the sad fact that there is not enough real money in
the system. The result of all these desperate monkeyshines is the impairment
if capital formation. That is, the failure to accumulate new wealth. The lack
of new wealth, along with declining prospects for the repayment of loans,
leads to a shortage of credit, especially to businesses that require large
supplies of it to keep gigantic complex operations like shale oil and gas
going
Shale
oil (and shale gas) share some problematical
properties. The cost of drilling each well is a big number, $6-8 million. The
wells deplete very rapidly, over 40 percent after one year in the Bakken formation of North Dakota. The oil is not
distributed equally over the whole play but exists in "sweet
spots." The sweetest sweet spots were drilled the earliest and the
quality of the remaining potential drill sites is already in decline. The
current trend shows declining first-year productivity in new wells drilled
since 2010 running at 25 percent.
There
are over 4300 wells shale oil in the Bakken formation of North Dakota producing about 610,000
barrels a day. In order to keep production up, the number of wells will have
to continue increasing at a faster rate than previously. This is referred to
as "the Red Queen syndrome" which alludes to the character in Alice
in Wonderland who famously declared that she had to run faster and faster
just to stay where she is. The catch to all this is that the impairments of
capital formation are working insidiously in the background to guarantee that
the money will not be there to set up the necessary wells to keep production at
current levels. In other words, shale oil (and shale gas) are
Ponzi schemes. The story in the Eagle Ford play in Texas is very similar.
I
haven't even mentioned the concerns about fracking
and its effect on ground water, and won't go into it here, except to
acknowledge that it presents an additional range of concerns.
The
current price situation in shale gas is different than shale oil. The
drilling frenzy in shale gas produced a glut, which drove down prices from a
$13 a unit (thousand cubic feet or mcf) to around
$2 at its low point earlier this year. That's way below the price that is
economically rational to drill and frack for it.
The price collapse has played havoc among the companies engaged in shale gas,
though it has been a boon to customers. A lot of the drilling equipment has
moved to the North Dakota oil fields. There will be less shale gas in the
period ahead and the price will go up. It has got to go above about $8 a unit
or there will be no reason for any company to be in the shale gas business.
But as is always the case in such a correction, the price will surely
overshoot $8, at which point it will become unaffordable to its customers.
The volatility alone will make the business of shale gas drilling impossible
to maintain. Forget about the USA becoming a major gas exporter.
You
probably get the point by now, so I will only add a couple of out-of-the-box
considerations vis-à-vis the prospect of the USA becoming energy
independent.
--
Production is getting so low in the Prudhoe Bay fields of Alaska that the
famous pipeline may not be able to operate. If the flow of oil reaches a
certain low volume, it takes longer to make the long journey. The oil cools
down and gets sludgy and some of the water that travels with it will freeze.
This could destroy the pipeline. The capital is not there to retrofit the
pipeline for a depleting oil field in a region that is difficult and
expensive to work in.
--
Exporting countries (the ones that send us oil) are depleting their reserves
and using more of their own oil, resulting in annually declining export
rates. China, India, and other still-modernizing nations compete for a
growing share of that declining export flow.
--
I have barely hinted at the geopolitical forces roiling behind the sheer
business dynamics. But here's an interesting one: the time will come when the
US will invoke the Monroe Doctrine to prevent Canada from sending its oil and
tar-sand byproducts to nations other than ourselves. Just wait.
Finally,
I have one flat-out prediction, one I have made before but deserves
repeating: Japan will be the first society to consciously opt out of being an
advanced industrial economy. They have no other apparent choice really,
having next-to-zero oil, gas, or coal reserves of their own, and having lost
faith in nuclear power. They will be the first country to enter a world made
by hand. They were very good at it before about 1850 and had a pre-industrial
culture of high artistry and grace - though, granted,
all the defects of human psychology.
I
don't think the US can make that transition in an orderly way. We're too
stricken with techno-narcissism and grandiosity. What troubles me is how we
will greet the epic disappointment that waits for us when we discover that
the journey to WalMart is over. My guess is that
being predisposed to superstition and religious fanaticism, the American
public will violently reject science and rationality and retreat into a world
of shadows. We're already well on our way. The IEA report will just
accelerate things.
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