Podcast

petrmalinak/Shuttestock

The Shocking Data Proving Shale Oil Is Massively Over-hyped

It's time for America to focus on the facts
Saturday, December 13, 2014, 8:03 PM

Hooray, oil is suddenly much cheaper than it used to be. That's great news, right?

Not so fast. For certain it's not good news for those counting on a continued rise in US oil production from the "shale miracle". Many drillers were challenged to operate profitably when oil was above $70 per barrel. Very few will remain solvent with oil in the $50s (as it is as of this writing).

So, expect US oil production to suffer from these lower prices if they persist. But even if oil prices rise and rise soon, there's new data that indicates the total amount of extractable oil from America's shale plays is less -- much less -- than what we're being told (or better put, "sold").

On today's podcast, Chris talks with oil analyst David Hughes, who has analyzed the major shale plays utilizing a massive database of well production results from America's shale basins. The data show that declines tend to be hyperbolic in all shale fields. The average first-year decline is 70%; down to 85% by year three. And we're drilling the best parts of these plays first: meaning that future wells will yield less even under the best results.

We're pinning our hopes of "oil independence" on faulty assumptions. Worse, we're using it to dismiss the Peak Oil theme at exactly the time we should be using this extra oil to construct the infrastructure for our next energy age (whatever that may look like), while we still have the net energy available to us:

Let’s just take a play like the Bakken.: 45% annual field decline, sweet spots are getting to be drilled out. We know that they need to drill 1,500 wells a year just to keep production flat. But as you go into lower quality rock, the well quality in most of the play's extent is only about half of what it is in the sweet spot. If you have to rely on the lower quality part of the play you need 3,000 wells per year instead of 1,500 to offset the field decline. But the wells aren’t any cheaper. They cost the same amount to drill. To be profitable for producers, it's going to take a lot higher prices in order to make that happen. And you can go through play after play and see the same thing. We are drilling the best parts of the plays now and it is just going to get worse down the road. We are going to need higher and higher prices.

The EIA has not only made what I consider really optimistic estimates on production, they have also made optimistic estimates on price. A lot of the infrastructure that is being built today is based on the assumption of cheap prices for the foreseeable future. That is not in the cards. With these recent cheap prices we are going to see production go down a lot faster than my estimates. My estimates are best case: I assume that the capital will always be there to drill the wells and that there will be no environmental concerns that restrict access to drilling locations. So in that way I am the best case. But even if you take my best case, the medium and long-term supply picture from shale is disturbing.

Sadly, corporations tend to think about the next couple of quarters. Politicians may think about the next election, but an energy sustainability plan has to have a vision of decades we certainly don’t see that in all the hype read every day. If you look at the mainstream media, I don’t think there is a lot of original research that is done there. I think people tend to repeat what other people said and it kind of takes on a momentum of its own, which is why I was so interested in trying to lay out as much of the basic data on these shale plays as I could. It's dangerous.

I mean, if you look at the infrastructure going forward in an era of declining oil and gas the number one way to promote energy sustainability in my view is figuring out ways to use less. And some of the infrastructure that needs to be built in order to give people an alternative to high energy throughput lifestyles takes a lot of oil and gas to build. And you know, this short term bounty that we are looking at should in fact be used to do that not to maintain business as usual to the bitter end and then face the consequences.  

Click the play button below to listen to Chris' interview with David Hughes (47m:24s)

Transcript: 

Chris Martenson:    Welcome to this Peak Prosperity podcast. I am your host Chris Martenson. Today there really is no more important story than what is happening to the price of oil. Now just like in 2008 oil has been plummeting catching everyone including this analyst by surprise. West Texas intermediate crude, the WTIC blend I am looking at right now at $58 and a few pennies here. Right here on the 12th of December. And the airwaves are packed with commentary. And the print media are churning out copy to explain all of this to us. Mostly with the spin that the price plunge is due to US shale oil flooding the world markets. And most are going out of their way to even find Wall Street analysts who make the claim that shale oil is profitable at $70, no $60, no $50. In fact, I even read last week one analyst claim that $25 a barrel was profitable in the shale plays.

Now why does all of this matter so much? Isn’t lower oil prices, aren’t those good for consumers and should we see all of this maybe as a gift? Well, yes for now. But unfortunately not in the sense that in the near term a lot of shale oil and shale gas companies are going to go out of business because they were not profitable when oil was 40% higher. And they are therefore even more unprofitable today. And over the longer term we see oil projects getting pulled left and right today. Deep water plans have been shelved. Capital cut backs have happened in the oil sands and this means that future production will be lower than if oil prices had remained elevated. So a little consumer happiness today potentially followed by damaging oil shortfalls in the future.

The shale story, however, is weighing on this and it is not a simple story as the media likes to portray. It is more than plucky American can-do ingenuity turning straw into gold. To really understand the shale oil future we need to understand that not all shale plays are created equally. And that within each play some regions are sweet spots and others are relative duds. We need to know that these wells deplete horribly quickly. And that the very process of drilling these wells creates all sorts of above ground troubles, including road and bridge damage and airborne fracking aerosols that drift about harming humans and animals alike.

Now possibly, worst of all, is that the nation if not the world has latched onto the shale story as if it were some permanent savior from the unpleasant task of facing up to the idea that oil is a finite substance. To help us understand all of this we could not have a better guess today than David Hughes, a geo-scientist who has studied the energy resources of Canada for nearly four decades including 32 years with The Geological Survey of Canada as a scientist and research manager. Now it is his work with The Post Carbon Institute that has really caught my eye. That includes "Drill Baby Drill," a 2013 report. Probably the most comprehensive, publicly available analysis to date of the prospects for shale gas and tight oil, as shale oil is usually called in the United States. "Drilling California," which was the first, first publicly available empirical analysis of actual oil production data from California’s much promoted Monterey formation and the subject of today’s discussion, "Drilling Deeper," which is a reality check on the Department of Energy’s expectation of long-term domestic oil and natural gas abundance. Welcome, David.

David Hughes:         My pleasure, Chris.

Chris Martenson:    Well, David I want to – really, I am very excited to have this conversation with you. And I want to help our listeners understand what is truly possibly in the shale plays. Obviously there is oil there. There is gas there. We are getting both out of the ground, that’s true. But I need to cut through the marketing copy and even outright industry propaganda that has muddied the waters so that our listeners can make some informed decisions. Now let’s focus on "Drilling Deeper," your most recent study. Tell us about this study. I want to know what it included, how it was conducted and for example, what sorts of data did you use to perform the analysis? What can you tell us about how you put this report together?

David Hughes:         Well, we had access for the first time really to the EIA’s play by play forecast which was published in the "Annual Energy Outlook 2014." And what I wanted to do is look at those forecasts and basically do a reality check on them. So what we did is we looked at the top 12 shale plays that basically account for 88% of shale gas production. In the EIA’s forecast 82% of tight oil production. We went through that play by play. The data source was Drilling Info, which is a commercial database out of Austin, Texas, that is used by the EIA and it is also used by most multinationals. And it contains basically all of the well production data on a play by play basis. So one can take it apart at the play level and one can also take it apart at the county level within plays. So I was interested in looking at the – as you referred to, all plays are not created equal. And even within plays all counties are not created equal. So we wanted to do things like you know, characterize well quality, what is the average productivity by county, by play. What are the decline rates? Both well decline rates which are very steep if you look at a tight oil play like the Bakken for example. The average three year decline is about 85% in production. The average first year decline is about 70%. Declines tend to be hyperbolic in all shale fields. The first year is the greatest, the second year is a bit less. Third year a bit less. So if you look at the decline of the field, which is really a combination of new wells declining quickly and older wells declining slowly, you can compute a field decline.

And so for a field like the Bakken the decline is about 45% per year, which means that 45% of production has to be replaced by more drilling in order to keep production flat. So if you know the average rate of production for the first year of wells in a play it is quite easy to calculate the number of wells you need to drill in order to keep production flat. And for a play like the Bakken that is about 1500 wells per year are needed just to keep production flat. So in round numbers at $10 million a well you need to put in about $15 billion a year to keep production flat on the Bakken. Production is growing in the Bakken and that is because they are drilling 2,000 wells a year. They are 500 wells to the good in terms of growing production. However, the higher production grows the larger the chunk that 45% drill decline takes. So you need more and more wells in order to offset decline. So basically, what we did for each of those plays is put all of that information into a spreadsheet. So we know what the well quality is in the sweet spots and we know what the well quality is in all the rest of the play. And typically sweet spots may be 15 to maybe 20% at the outside of the total play area.

So we know that fundamental law of oil and gas companies is they drill their best locations first. So the wells are going into the sweet spots today, but as drilling locations are used up in sweet spots they are going to have to go more and more into lower quality rocks. We can put all of that into a spreadsheet and come up with production forecasts going forward.

Chris Martenson:    So this spreadsheet then, this is at the individual well level? So like well has a code that is associated, some alpha numeric code and says this is well XJ55 or whatever and you had each of those in a spreadsheet so they were sorted I guess by time so that you would have – I mean there are thousands and thousands of wells drilled in the Bakken and some of them get started to be drilled in what 2007? And then there is a vintage in 2008, 9, 10 so did you have all that data available?

David Hughes:         Yes. So for a play like the Bakken we had all of the producing wells up until about July of 2014. "Drilling Deeper" was published in late October. We tried to keep it current to mid 2014. So we had every well that was drilled from year 0 in all of those different plays.

In terms of making the forecast, basically we used the average production over the first year which allowed us to determine the number of wells that you need to offset that 45% decline. And you know, in the spreadsheet you start off assuming—in the case of the Bakken you know, engineering companies are telling us that well technology is getting better and we are making those wells more productive. I actually was doing a check on that for every play. I looked at the average productivity by year from 2009 until 2013. So you can see if in fact, it is going up or if it is not going up.

Chris Martenson:    This is per well productivity, right? So that is what we really care about is productivity of the wells and just at this point I need to interject. I think that the EIA has muddied the water to turning to what they call "per rig" productivity and saying people have thrown this at me a lot lately "oh 300% productivity improvement." No, no, no that is a process improvement because what they have done is they managed to figure out ways to drill multiple wells off a single pad. And they have these things called walking rigs which allows each rig to spend less time in transit and more time drilling. So we are drilling more wells, but what you are talking about is the per well productivity, which is what we really should care about, right? Because if we are getting more oil out of each well then yes, there is more oil coming out of the play. But if we are drilling more wells faster that is not the same thing. So you are talking about per well productivity, right?

David Hughes:         Absolutely.

Chris Martenson:    So what do you see there?

David Hughes:         You know, the other thing is how many wells could you drill in a play? That was another fundamental parameter that we looked at for every play. If you look at investor’s presentations there is a lot of talk about down spacing. How close can you space these wells before you get interference. There is a – what I thought was a really good paper published by an engineer at Drilling Info who looked at the Bakken in terms of down spacing. In essence if you drill two wells 300 feet apart, initially the productivity will likely be very high. It would likely be comparable between the two wells. But if you look at it over 12 months or 24 months you can start to measure the interference so one well is cannibalizing another well’s oil. And the drilling info paper basically said below about 2,000 feet spacing you are starting to see interference if you look at a 12 to 24 month timeframe.

We made assumptions about how many wells you can drill in a play. For a play like the Bakken we assumed when the play is said and done you can drill about 32,000 wells. There is 8,500 producing wells right now. We felt you could drill four times as many wells as are there right now. That is a key fundamental parameter in making the forecast. So if rigs are more productive, sure you can drill those locations out quicker, but you don’t necessarily get any more oil at the end of the day. It is per well productivity that counts at the end of the day.

Chris Martenson:    Let me talk about that per well productivity then. This is a central part to the story that is out there. So I want to make sure we get this right. So a typical Bakken well they drill down whatever 10,000 feet, slant it sideways. And then they go sideways in this big horizontal stage and I guess how much we get out of a well is going to be a function of a number of things. One, the underlying geology that is just true for that rock. Two, how long of that lateral we drilled? Is it 5,000 feet? Is it 10,000 feet? That makes a big difference in the collection area. Then I guess are we doing a five stage frack or a 30 stage frack? So how much we shatter that rock up. All of that sort of plays in and I assume that are playing with all of those parameters over time. But you have got data that showed these wells by year. And if we really were — I don’t know how you would factor out the longer drilling and the more fracking, but how much additional oil are we seeing coming out of the wells because we have made improvements to the drilling techniques and the fracking techniques? How much is that?

David Hughes:         Well, it depends on the play. And it depends on the region within the play. So if you look at the Bakken the average well that was drilled in the Bakken went up about 7% from 2011 to 2013. That is a combination of better technology, as you say longer horizontal laterals, more frack stages, higher water volumes, more propping and it is also a function of people drilling in the sweet spots. It is hard to differentiate the two. I think it is a combination of both; better technology and drilling in the sweet spots.

So for a play like the Bakken we say okay, we are looking at a slight improvement in well productivity. So I’m going to assume that is going to continue for another year or two before people start to have to drill in lower quality parts of the reservoir. And from peak well productivity, well productivity will decline as you go into the lower quality rock. The technology is never going to make up for bad reservoir rock. The Bakken is still quite a young play. As I said, they have only drilled about 25% of the total potential locations. So there are still locations in the sweet spots. Well, those are running out fairly quickly.

If you look at an older play like the Barnett which is a shale gas play in Texas and that is where fracking really got its start. Well quality peaked in 2011. So they drilled about 20,000 wells in the Barnett now. 4,000 of those are no longer productive. Well quality peaked in 2011 and it is now down 17% from peak. So if you look at the top counties in the Barnett they are finished .There is already eight wells per square mile and drilling has to move into lower quality rock. Production of the Barnett is now down 18%. In a mature play like the Barnett you are really seeing the fact that geology wins out every time against technology, despite what Halliburton and some of these companies will tell you.

Chris Martenson:    Now one quick thing on the Barnett. Somebody said to me once, "well that’s because natural gas prices are at say $3 to $4.00 per NCF. But if natural gas prices went back up to $10 or $12.00 from its current $3 to $4 that people would start punching more holes into the Barnett." That is the slow down in the drill program accounts for that decline, but they could ramp it back up again if prices were higher. We know price is always a function in this story that is lurking out there. How much do you think the Barnett would be sensitive to additional price improvements and people drilling more, and how much do you think it is past its prime, it is already done?

David Hughes:         Well, I looked at that. And that is true to a certain extent – the drilling rate in the Barnett is down. It is only about 400 wells per year right now. So in every play drilling rate is the key parameter. How fast you drill determines what the production profile looks like. So in every play I get at least three and sometimes four different scenarios of drilling rate. And the Barnett I – my low scenario is we just keep drilling 400 wells per year. What does that look like in terms of future production? My most likely scenario is the price of gas is going to go up a bit and drilling will be bumped from 400 to 600 wells per year. And then it will gradually decline to 500 wells per year to move into the lower quality parts of the play, which they are already moving into.

But I also did another study, another projection that said okay what if quintuple drilling rates in the Barnett? If we go from 400 to 2,000, which is what it was at its max back in about 2008. And if you do that you can certainly stop the decline and reverse it to a new peak. That new peak would happen in about 2016. You know, if we instantaneously increased the drilling rate by five times. However, when you look at the total production out to 2040, it doesn’t change the cumulative production that much. All you do, if you drill faster, you get it quicker. So if you look out through say 2020-2025 in that quintuple drilling rate scenario, all of a sudden production falls below what you would have got if you follow my most likely scenario. So there is no free lunch. You can drill fast and get it quick and then suffer the consequences later. Or you can drill at what I consider the most likely rate.

I went through that scenario for all the plays and then stacked them all up and compared my most likely scenario to what the EIA projected.

Chris Martenson:    Okay. I am going to assume given the current prices that we are going to fall below your most likely scenario for a while just because prices aren’t supportive of a real robust drilling program right now.

To get back to drilling deeper—among the major conclusions of your report were that shale oil would peak in output before 2020. I think the EIA is roughly in agreement with that. But where you disagree with the Energy Information Agency, the EIA, is that you feel they have overstated the amount of oil that the US would produce by 2040 by a really very wide margin. I want to understand those conclusions. So let’s break them down.

First, talk about the peak in shale oil happening before 2020. How did you arrive at that conclusion? I understand that you’ve modeled this. You have ran a variety of scenarios. When I say "shale oil peaks before 2020," I assume that is under your most likely scenario. Let’s talk about that scenario and what the implications of that are. So do you still see a peak before 2020?

David Hughes:         Yeah. The actual peak before 2020 was for the two top plays, which are the Bakken and the Eagle Ford. The Bakken and Eagle Ford make up 62% of current tight oil production. So those are really the two biggies. I also went through Permian Basin plays. But the Permian Basin is unlike the Bakken and Eagle Ford; the Permian Basin is really a very old place. They have been around for 40 to 60 years. Other plays like the Niobrara and the Austin Chalk would fall into that category too. So these are really old plays that we have known about for a long time and they are redeveloping them with better technology. With fracking.

The Bakken and Eagle Ford are unique in that they kind of rose from nothing. They're true tight oil shale oil plays. I was able to do forecasts for those two for tight oil and for the Permian basically I just looked at all of the historical data. I didn’t actually make projections. But if you look at the Bakken and Eagle Ford, the two most important tight oil plays in the US, I went through those and did the same scenario based on drilling rate and looked at the most likely scenario. So for example, for the Bakken, not withstanding the current low oil prices, I assume that the drilling will continue at 2,000 wells per year and then gradually fall to 1,000 wells per year as they move into the outlying, low quality parts of the play.

And if you do that, Bakken production rises to about 1.2 barrels a day. In or around 2015, 2016 you get a peak followed by a long decline. Same thing for the Eagle Ford. The Eagle Ford is actually the number one tight oil play in the US right now. They are plowing 3,500 wells per year into Eagle Ford. Yeah, its just incredible, it’s 10 wells per day. And I assumed that drilling was going to continue at that rate and gradually decline to about 2,000 wells per year as they move into the outlying parts of the play. If you do that, it peaks considerably higher. I am just trying to think right off hand… I think my most likely scenario was around 1.4 to 1.5 million barrels a day and that will happen around 2016, 2017. If they ramped up drilling in Eagle Ford they could go much higher. They can probably top out at 1.8 million barrels a day. Also the Eagle Ford produces a lot of associated gas. So there is a lot of value in those wells. You look at the trajectory, peaking in 2016, 2017 and declining. When you add up the production in 2040 in the Bakken and the Eagle Ford compared to the EIA forecast for the Bakken and Eagle Ford, mine are less than a tenth of the production in 2040.

Chris Martenson:    Less than a tenth.

David Hughes:         Less than a tenth. The other interesting thing is the EIA seems to have underestimated short term production. So my projections are actually for higher production early on and a higher peak than the EIA. But you know, much worse scenario down the road. Much lower productivity by the time you get to 2040.

Chris Martenson:    This is interesting. I assume you have read or heard of the University of Texas at Austin study on shale gas that concluded that US government estimates of the amount of natural gas that can be extracted by fracking are far too optimistic and that shale gas production will peak in 2020, I think they put it, and decline rapidly. As I understood it what they did is they didn’t look at county level resolution. They broke down all the plays into square mile resolution, which some counties are thousands of square miles. So this resolution is much higher and that helps them identify sweet spots or not sweet spots more accurately, I assume. So I am wondering, did you read that? And how did their study conclusions differ from yours or do your conclusions match? Then given your answer to that, what is the EIA doing wrong, or what should they consider amending in their approach to be more realistic. So first on the study – did you see it and how do your conclusions match?

David Hughes:         Oh yeah, I've got a detailed comparison in "Drilling Deeper" between my work and UT's work and they are very comparable. You know, if you look at the section by a square mile by square mile resolution, you can do that but in fact the critical parameters — one of the key parameters you get for every well is IP, right? That is the highest one month production or the highest six month production of every well, which I mapped, which gives you a pretty good idea of where the sweet spots are. There is a lot of other parameters you can look at for shale gas, thermal maturity, organic matter content, porosity, natural fracture density, things like that, but those parameters are not measured at a square mile resolution. They are measured generally at a much broader scale. So I think that you can do a pretty good job at the county level, which is the level that I took it — and parts of counties. When I looked at the total play area, I looked at the boundaries between productive wells and non productive wells so we could put a limit. I only used that portion of the county that was productive in determining the productive play area. When I did the comparison I talked to Scott Tinker at UT. Basically their base case and my most likely case are very close. There are only two studies that they published so far – the Barnet and the Fayetteville — so I did a detailed comparison. In fact, they may be a little more pessimistic than me in some cases. But you know, we are in broad agreement that the EIA is wildly optimistic.

Chris Martenson:    What would the EIA need to do to become more realistic? Where are they – we know that the – so I mean we know the EIA in the case of the Monterey shale they turned to a private firm and just did some back of the envelope calculations and then had to downgrade the Monterey estimates of what that reserve was going to be at by 96%. Something that you had come to a conclusion a long time before. Obviously the EIA had some methodological issues or they relied on the wrong parties in the case of the Monterey. But more generally, what is the EIA doing that is giving them these inflated estimates do you think?

David Hughes:         I scratch my head about that. If you go through "Drilling Deeper," — it's a free download for your guests or audience — I've done a comparison. The Barnett, my most likely case, compared to the EIA; it is really kind of bizarre. The EIA agrees that the Barnett peaked in 2012 and it is going to decline but then they have a ramp up to nearly the equivalent of the 2012 peak in 2040. So it doesn’t fit with the fundamentals of the play. The only thing I can think of is they have a phenomenal faith in technology. That somehow someone is going to pull a technological rabbit out of his hat. Same thing if you go through play by play I have done the comparison. One of them I think the Bone Spring in the Permian I think the EIA is too conservative, but every other one they are way too optimistic.

Chris Martenson:    Well this is really important because as I look at it I see chemical companies and power utilities, all of them investing tens, hundreds of billions of dollars in new property, plant, and equipment. Investments with 40, 50 year life cycle horizons. Because they are taking advantage of, I am quoting here, "100 years of cheap, natural gas," mostly from the shale plays. If you were going to advise these companies, what would you – would you tell them that you think the EIA's assessments are not the ones they should be using?

David Hughes:         Absolutely. And that is one of the reasons I was so interested in doing "Drilling Deeper." And I have laid out, if you go through it, there is 20 pages a play and a lot of the basic fundamental data that has never been available is there in charts and graphs. Let’s just take a play like the Bakken. 45% field decline, sweet spots are getting to be drilled out. We know that they need to drill 1,500 wells a year just to keep production flat. But as you go into lower quality rock and the well quality in most of the plays is only about half of what it is in the sweet spot. If you have to rely on the lower quality price of the play you need 3,000 wells per year instead of 1,500 to offset the field decline. But the wells aren’t any cheaper. They cost the same amount to drill. Obviously you need a lot higher prices in order to make that happen. And you can go through play after play and see the same thing. We are drilling the best parts of the plays now and it is just going to get worse down the road. We are going to need higher and higher prices.

The EIA has not only made what I consider really optimistic estimates on production, they have also made optimistic estimates on price. A lot of the infrastructure that is being built as you say is based on the assumption of cheap prices for the foreseeable future. That is not in the cards. With cheap prices, we are going to see production go down a lot faster than my estimates. My estimates are best case, so I assume that the capital will always be there to drill the wells and that there will be no environmental concerns that restrict access to drilling locations. So in that way I am best case. Even if you look at my best case, that will be rather disturbing to me if I was a petro chemical company or somebody that was investing a lot in gas fired generation.

Chris Martenson:    Alright. Let me test one of the assumptions then. There are a couple of key assumptions that are really driving the overall scenario then. First is going to be the decline rates of each wells and that leads you to say here is why we need to replace 1,500 wells. Let’s start there with that decline rate. I was reading this Bloomberg article yesterday and I am quoting here, “Shale production will keep growing because the rate of decline from wells has been overstated, Ed Morris, head of commodities research at Citigroup said." So I am already reading things where they are tossing out that decline rates have been over estimated, but when I read your report what I saw is that you didn’t estimate these decline rates; you measured them, right? So what is the difference between these? Did you estimate them? It looked to me like a measurement. Like you just said "let’s sum up all of these wells by vintage and see how fast they decline." That’s not an estimate. That is more of a measurement. What do you think the disagreement here is?

David Hughes:         Well, if you want an optimist, Ed Morris makes the EIA look like the most conservative organization on the planet. He has always been wildly optimistic. If you look at his latest forecast for tight oil, we're going up to 7 million barrels a day and it is just going to stay there forever. I am not sure what Ed uses to make those kind of statements, but what I used is every well. My decline curve for the play in every play is all the wells in the play. I looked at the most current five years worth of drilling. I also looked at well decline curves in every county. You know, all of the top counties at any rate in every place. That is data. It is just nothing imaginary about that.

Chris Martenson:    Alright. So you feel like the well decline rate is something we have a handle on, we can model that. We have enough data out of the big plays, the Barnetts, the Fayettevilles, the Eagle Fords, Permian, Bakken — we've got enough. Maybe even Marsalis. We have enough data now to say, "Hey this is kind of how this plays out." Is this a fair statement?

David Hughes:         That is a very fair statement.

Chris Martenson:    Cool alright. So second big piece – the second big factor I have some confusion around is how much oil is ultimately going to flow from a well, which goes by the acronym EUR, the ultimate recoverable amount of oil. I've got to tell you David, the typical EURs that I am still reading in the newspapers from the Bakken wells, they just toss around this 500,000 barrel amount; it is a lot of oil. And looking in "Drilling Deeper" I found a table you had your EURs that averaged 378,000 barrels a well. That is a big discrepancy. How do you explain that one?

David Hughes:         I think if you look at — was it the Bakken you are looking at?

Chris Martenson:    Yeah.

David Hughes:         I think if you look at counties like Montrail and McKenzie they are higher than that. And if you look at the outlying counties like Divide and Richland they are much lower than that. I can’t recall — I think the Montrail and the McKenzie are about 400 and the Richland and Divide and some of those are down sort of in the low 200s. So overall they may average 378 like you say.

Chris Martenson:    Yeah. That was your total. So how did you derive your EURs? Was that by taking the decline rates and extrapolating them out and coming up with some idea of how long these wells will persist?

David Hughes:         Yeah. The bottom line is nobody knows how much oil is going to come out of those wells until the last barrel gets pumped. So it is an assumption, right? You fit a curve – most companies fit a hyperbolic curve or some combination of hyperbolic/exponential. What I did is I used the actual data for the first four years. So the decline curve for the first four years in a play like the Bakken is pretty solid, you know, it is not much doubt about that. So I took the data for the first four years — how much oil is that cumulatively? And then I fit a 13% exponential decline after that, assuming the well would live to be 30 years old, which is a totally unproven assumption. But for the sake of comparison so I could at least compare the EUR between counties. I used a 13% exponential decline. That number is certainly arguable. If you look at the decline in year four in the Bakken it is probably about 20%. So using 13% as a terminal decline is maybe optimistic. The other thing that if you look at those EUR diagrams in "Drilling Deeper," you will see I have denoted the amount of oil that is produced in the first four years versus the next 26 years, and typically 50 to 60% or more of a well’s total oil will be produced in the first four years. So you know, if you are in a sweet spot you can make your money back pretty quickly. That is one of the beauties for oil companies about shale wells. The downer is we don’t know if it will only last for 12 years, and that assumption of total EUR is just that, an assumption. I looked at the Barnet and 4,000 wells are no longer producing and their maximum life is only about 10 years. Their average life is something like four years. So you know, anybody that tells you a well is going to produce this much oil is really kidding you. It is only an assumption at this point in time.

Chris Martenson:    The Barnett is mostly, it is all gas right? So maybe the gas plays will be different, but this is astonishing to me, David, the astonishing thing is that the Barnett really started getting drilled hard in what, 2007-ish maybe, 2008?

David Hughes:         Or the Bakken, you meant?

Chris Martenson:    No, I was thinking of the Barnet. When did that start getting drilled?

David Hughes:         Oh okay. It really got started in the late '90s for the Barnet. I mean it really ramped up after about 2003, 2004.

Chris Martenson:    Right, but that’s just like 10 years ago that is when the ramp up started and the peak happened on that gas play within a 10 year window, let’s just say, and so obviously the Bakken is going to be different because there is still what 24,000 well sites that can be drilled. That will just take time. At 2,000 wells a year we still got 12 years of drilling. So it is going to take some time for that to really — there is plenty of room to continue that drill program, but it is not forever. And so this is the part I really want to get to is this idea that somewhere before or around 2020 even these shale plays now are in decline from a total production standpoint. And as far as I’m concerned, because I am 52 now, that is like tomorrow. Time seems to go faster as I get older. So this is really soon as far as I am concerned and my concern in trying to publicize all this is we got the data, you have done this incredible work, there it is. There is really nothing to argue about with decline rates. We can quibble a little about the EURs. We can talk about how close the wells might be spaced, but really we are sort of wiggling a little. We are not going to get 100 years of gas. We are not going to get 100 years of increasing oil production out of this whole thing, Ed Morris’ weird graphs not withstanding. So my concern is that this is really, really important because so many decisions are being built in this country around this idea that we have solved this energy crisis and it is now in the rear view mirror, but it is really not is it?

David Hughes:         Absolutely not. I have been on that same theme there Chris for many years. Corporations tend to think about the next couple of quarters. Politicians may think about the next election, but this is an energy plan, an energy sustainability plan has to have a vision of decades and we certainly don’t see that in all the hype we read every day.

Chris Martenson:    If I had my magic policy wand I would say "great, we can pretty much add up how many trillions of cubic feet of gas we think we are very likely to get at a certain price and here is how many billions of barrels of oil are left and these are two finite numbers." And then we would take those and we would go "where would we like to be when those finally run out" — or nothing every fully runs out, but we are going to have a blob of energy that we get to use over this next period of time, let’s call it 10 or 20 years, and then it is largely gone at that point in time. Dregs remaining. That is what I would love to have a conversation. Where do we want to be in 10 or 20 years? Because business as usual will get us to a place where we have a lot of infrastructure that can’t be supported any longer because we don’t have the goods for it. This is the part where I get in arguments all the time, people go "oh but we are so swamped with natural gas that look it drove prices down. It just proves that technology will always find a way." My response to that is: "Did you know that we still in the United States are a net importer of natural gas?" And most people don’t know that part because they hear we are making LNG terminal decisions because we have so much that we better just export it. It is just astonishing to me that the data that you have and the public perception it is still pretty far apart.

David Hughes:         Yeah, it is. You know, I think that if you look at the mainstream media, I don’t think there is a lot of original research that is done there. I think people tend to repeat what other people have said and it kind of takes on a momentum of its own. Which is why I was so interested in trying to lay out as much of that data as I could. It is dangerous. I mean if you look at the infrastructure going forward in an era of declining oil and gas, the number one way to promote energy sustainability in my view is figuring out ways to use less. And some of the infrastructure that needs to be built in order to give people an alternative to high energy throughput lifestyles takes a lot of oil and gas to build. And you know, this short term bounty that we are looking at should in fact be used to do that, not to maintain business as usual to the bitter end and then face the consequences.

Chris Martenson:    I agree. I agree. Final question – and thank you for your time, so generous. Final question is: What is the reception to the report? Has the EIA reached out? Have any government people talked to you? Is industry wanting to know more? Tell me about how it has been received so far.

David Hughes:         Well, I sent a copy of the report the day it was published to John Staub at the EIA who is the head of the oil and gas team and I didn’t hear anything back. I sent it to Scott Tinker at UT and he was pretty enthused and sent it around to his team. So they are certainly looking at it. In terms of the mainstream media, they really didn’t have a lot of major coverage of it unfortunately. In terms of the industry, if you look at the industry lobby group, Energy in Depth is a lobby arm of the Independent Petroleum Association of America. They took special pains to write an attack article on it. They didn’t really criticize any of the data in it. They sort of had to resort to ad homonym adjectives that apply to me, which wasn’t appreciated. I think if you look at the second tier of media, we did get an awful lot of coverage and none of it really negative that I can see. I think the data that is in Drilling Info is data that is not available anywhere else. This is data that industry uses, but it has not been widely made available. I am hoping that "Drilling Deeper" will have a long shelf life and people will be able to refer back to it again and again. Hopefully it will promote a bit of saner thinking in terms of our energy future going forward.

Chris Martenson:    At a minimum I would hope that the good people who are running the state of North Dakota would take a look and plot a strategy based on the likely arc of their industry because it is completely calculable. As long as they have a long-term view of that and understand where they are going I think that would be great. Listen, thank you so much for your excellent and data driven work and for your time today. I will note that we will have a link to "Drilling Deeper" at the bottom of this podcast. People if you look at the bottom of this page you will see it right there and that will take you over to the Post Carbon website and a download. And you should read it. You should check it out. If you like your data and you love it done well and analyzed well and with good writing around it, this is an absolutely essential report because everything depends on the energy story as we go forward and boy the disinformation out there is just magnificent right now and "Drilling Deeper" and other work by David Hughes is state of the art. It is great stuff. So please everybody take a look at that and David thank you so much for your time today.

David Hughes:         It's been my pleasure, Chris.

About the guest

David Hughes

J. David Hughes is a geoscientist who has studied the energy resources of Canada for nearly four decades, including 32 years with the Geological Survey of Canada as a scientist and research manager. He developed the National Coal Inventory to determine the availability and environmental constraints associated with Canada’s coal resources. As Team Leader for Unconventional Gas on the Canadian Gas Potential Committee, he coordinated  publication of a comprehensive assessment of Canada’s unconventional natural gas potential. He is currently president of a consultancy dedicated to research on energy and sustainability issues.

Over the past decade, he has researched, published and lectured widely on global energy and sustainability issues in North America and internationally. His work with Post Carbon Institute includes Drill, Baby, Drill (2013), the most comprehensive publicly available analysis to date of the prospects for shale gas and tight oil in the United States, Drilling California, the first publicly available empirical analysis of actual oil production data from California’s much-promoted Monterey Formation, and Drilling Deeper, which investigates whether the Department of Energy’s expectation of long-term domestic oil and natural gas abundance is founded based on an in-depth assessment of all drilling and production data from the major shale plays, current through early- to mid-2014.

Hughes’s work has been widely cited in the press, including in The Economist, Forbes, Bloomberg, The Los Angeles Times, and The Atlantic, and has been featured on CNBC, Canadian Business, Walrus and elsewhere. He is a board member of Physicians, Scientists, and Engineers for Healthy Energy and the Association for the Study of Peak Oil and Gas – Canada. He has contributed to Nature Journal and Carbon Shift, an anthology edited by Thomas Homer-Dixon on the twin issues of peak energy and climate change.

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28 Comments

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 529
IIRC, $50 oil means the crash course was wrong.

First, I am NOT going with this where I might: this isn't about heckling Chris. Chris, in general you are very, very right. But in the details, you said (IIRC) that oil wouldn't ever again get down to $50 a barrel. You said this, because the economics don't support oil at $50 a barrel.

I think this is time for another, deep learning experience, some that (again, IIRC) Chris is all about.

It is this: prices can go -- and stay -- where they are absolutely unsupportable, as long as the people in power are willing to make others pay even larger costs.

Second: prices are likely to get worse, if the people in power want it that way; and if they already have been acting to hold things that way, you can expect it to continue unimaginably long.

Third: if economic necessity forecasts a crash, if that forecast is wrong, it means the situation is likely to be worse, not better.

I am sure there are other lessons that can be taken. I think that a lot of this website NEEDS to be rethought, as we discover other of our assumptions are wrong.

Is there a forum or group for hashing these things out, and trying to discover the truth behind each error?

Jbarney's picture
Jbarney
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Posts: 230
Big Picture

Off the mark on some predictions, at times, yes....are the big picture assumptions "wrong"?  I hope so.  Are the warnings which make up the foundation of the Crash Course off the mark?  In the long term, probably not.

If Chris and Peak Prosperity have made a few incorrect calls at times, oh well.  It is up to each of us to use multiple sources to guide us through that which we feel is important.  It is not possible for anyone to be right all of the time, but the updated Crash Course is an effort to expand on information that was put together years ago.

Deflation vs Inflation. Chris has stated his belief on this multiple times.

Peak Oil vs the status quo. If he is off on the timing, oh well.

Here in Vermont the price of a gallon of gas back in the spring was about. $3.75.  We just dipped to $2.95 this week.  That is around a 25% drop in eight months.  Before the 2008 crisis it spiked to around $4.65....you have to wonder as all this works itself out....how high the next spike will be.

Peace,

Jason

darturtle's picture
darturtle
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Posts: 29
Duration

You can stay in 100 foot deep water for 1 minute but not immerse your face in 1 foot deep water for 10 minutes.

It is not 2008 in which oil price drop, although deep, was short in duration. Why, in 2008, we saw OPEC reacted differently. They cut production.

Today, virtually no OPEC nation is in a position to cut back production. Most need $$$ NOW for domestic reasons which most US politicians elected by people would agree if it happened to USA. Saudi Arabia and handful of small Gulf nations can tolerate for a while but they simply don't want lose market share. Furthermore, tap into reserve now may mean a fire sale (such as US stocks) which won't bring them much.

locksmithuk's picture
locksmithuk
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Posts: 77
Errors of assumption
Hi Michael_Rudmin
 
 
I don't doubt that Chris would be the first to admit to making errors. I think he'd also recall advising everyone of something he has said during his recorded addresses: everyone should form their own views when all is said and done.
 
As you no doubt know, many of the arguments presented in the Crash Course and on this site are fact-based. Sure, there are suggested outcomes, but outright, money-down predictions are generally rare. To call $50 oil economically unsupportable might be reasonable based on historical economic theory, but who really knows in a world of complex market distortion? But that's still another 17% drop from today's price. That oil has managed to reach ~$60 is possibly an aggregation of many different factors, some predictable, others not. For instance, who could've predicted that an aircraft would be shot down over Ukraine, followed later by sanctions and maybe the spark of an attack on the rouble & Russian producers via an oil price war?
 
Personally I think it's too early to start calling errors on the basic assumptions on this site, many of which are based not on on conjecture or what-ifs, but on data and facts... with us members left to decide for ourselves. I note a sense of conjecture in your first and second points, but I'd be genuinely interested to see how you would reshape the basic fact-based assumptions on which PP is based. Please share them.
 
Like you I question why the wheels haven't come off yet, but I don't think any of us - Chris included - could say how long this particular piece of string is. However, all the signs of the GFC horror show are still with us. Unless TPTB are ready to unveil their magic bullet (and I'd love to know what that might be), then we're still staring down the same barrel this time around, only it's been re-bored a little larger than before.
Michael_Rudmin's picture
Michael_Rudmin
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Posts: 529
No, I tried to make it clear that the basic PP is right

“..but I'd be genuinely interested to see how you would reshape the basic fact-based assumptions on which PP is based. "

First, let me state absolutely that I think the basic PP is spot on. I stated that 'in general, Chris is very, very right'.

However, I do think Chris has been missing some of the immediate calls, and is more likely to miss immediate calls the farther his model is from reality.

To a large extent, AFAICT his model hopes for the best, and fails to model outright lies, chicanery, war, mass murder ... even as he mentions them as possibilities. All of those characteristics which nation-states reserve to themselves, he doesn't model. He allows that they may happen, but his model assumes the best. If you will, it plots a curve: best case fail, this is where we are.

Well and good: there are a lot of things in politics that are very hard to model.

But not only do nation-states do these things, so do corporations (how about blackwater?), NGOs (IMF), and the super-wealthy (Russian oligarchs, Putin the worst of all).

So although you do well to say 'best case fall, this is how it goes', you can't say 'This is how it WILL go'. That limit case is not a limit as to 'what can happen', it is rather a baseline.

If you will, the crash course shouldn't be saying 'oil can't reach 50'; rather it should say '50 is unsupportable; with enough economic disruption, it could hit 20; if we see it approach 50, we will start looking at side effects'.

In other words, you take Chris Martenson's limit case line, and black out the far side of the envelope, when you should be taking his line, and clustering predicted data around both sides of it.

cmartenson's picture
cmartenson
Status: Diamond Member (Online)
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Posts: 4548
Never confuse....

I think it's important to separate prices from value and from costs.  In a world of manipulated prices anything is possible.  

I never said oil could not go to $50, all I ever said was that the days of cheap oil are behind us.  And that's unequivocally true from the cost side of the equation.

Here's what I said in a recent piece on energy:

Which brings us to the IEA's  conclusion which is that shale oil is actually doing two things;  driving the price of oil down below the price required for this massive investment program, and masking the supply issues by temporarily providing extra oil.

Emphasis on ‘temporary’ because the average shale field in the US peaks about ten years after the drilling begins in earnest an all US shale fields are currently projected to peak somewhere around 2020.

The risk the IEA sees is that shale oil, coupled to a generally weak global economy, could conspire to keep oil prices down below the new project threshold long enough to cause real trouble in the future.

The call for things to be incorporated in the PP model is off the mark because there is no 'model' because you cannot model human behavior.  I have no idea what corrupt politicians and venal power brokers will do in the future.

Would they conspire to drive down oil prices to use as a geopolitical weapon without any apparent regard for the damage that such a policy would inflict on future oil supplies? Certainly.  That level of idiocy would barely crack the scale of recent moronic political maneuvers.

It's really, really important, especially in a bubble, to never confuse prices with reality.  And very hard to do because our entire machinery of cultural reinforcement always puts prices at the center, as if they were more real than reality itself.

Which makes sense because once you understand how things work you realize that currency is meaningless because it can be electronically created in unlimited amounts by unelected people whose books will never be audited.

What do 'prices' mean in such a world?  Less than most assume, is how I see it.

So instead we collect the data on how the world works, how much oil is produced, how much it costs to produce new marginal barrels, how many new marginal barrels are coming out of the ground and suddenly - voila! - things are pretty clear and easy to understand all of a sudden.

Just put these three facts together and see what you come up with, and then trust yourself:

  1. Ex-US, since 2005 the world has spent $3.8 trillion on upstream oil and gas projects to increase production.
  2. Again ex-US, the world is producing exactly zero more barrels despite all that spend.
  3. Since 2005 the OECD countries have collectively piled on $30 trillion of new debts, mostly at the sovereign level.

Even when we toss in the US's shale production gains the incremental gains to the world supply of oil are very, very modest on percentage terms.

So....we have increasingly difficult and modest oil gains on the the one hand, and we have skyrocketing levels of debt on the other.  We can each come to our own conclusions about how that will all play out.

But, to be crystal clear, I have always made it clear that oil demand is a key variable in the equation and that an economic decline could cause oil prices to dip back down again.

The concern I have about that particular outcome is that even with oil over $100 we weren't increasing global oil supplies and now with oil under $60 so many needed projects are going to be scrapped that future oil supplies simply won't be there to provide the growth we need to justify all piles of debt draped across the developed nations.

But don't let prices be your guide.  Or, if you do, don't be too surprised if your holdings of Italian ten-year debt at a yield of 2.06% turn out to be a monumentally bad 'investment' .. just because everybody is paying a certain price for something does not magically confer "good idea status" upon it.

Michael_Rudmin's picture
Michael_Rudmin
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Posts: 529
As a person dies, so dies a governance

Let us be clear that in a real sense, there is a single governance over all the world -- and it is failing. But then let's compare it to a dying cancer victim: the blood sugar, oxygenation, pressure will all at times shoot high, crash low, even past unsupportable levels. A lot of it is caused by medicines applied to counter a different problem. A lot of it is caused by competing failures (diabetes, brain, heart, etc.)

So it is with a dying system -- and largely the people in the dying system are more likely to die, than to change successfully to a new system. Some will kill (here you see the pessimist in me); many will fail to thrive.

In line with that, you are likely to see oil prices -- and gold ,and anything else -- crash insupportably low, shoot high, swinging more and more wildly. That's what happens during the pillaging process, and short term, the pillaging overwhelms the other economic processes as well.

So you can't just say, 'this is a limit -- we won't see $50 oil again'. You can say, 'Yes, you quite will possibly see $50 oil again, and you might like it when you do, but a year later, the nation will still be doing worse than it is doing now'.

Also in line with that, one should be considering each and every industry, and how it will react or respond to extremes that are happening now. when overly stressed, some players may choose the honorable bankruptcy; some may choose mergers; some may develop better processes; some may dissolve as their founder and owner dies from the stress and shock.

Michael_Rudmin's picture
Michael_Rudmin
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Posts: 529
Thank you Chris, for the clarification

Chris, my apologies, perhaps I misunderstood what you had said in the crash course, or perhaps my IIRC was indicative that I a# not remembering correctly.

I kear what you say about not being able to guess what politics may do -- you're probably right. But it also makes sense to try to model how the recent swings will impact particular industries.

That is, say 'suppose the swing gets worse, how will this affect oil? Gas stations? Auto production? Employment near and far? The Pentagon? The Ruble? Medical insurance? Some of the answers will be strong and sure -- model those first. Likewise, see what will happen if the swing reverses, though initially that is unlikely.

bwh1214's picture
bwh1214
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Joined: Jun 1 2011
Posts: 38
Shale vs Deepwater

Chris, 

This is a subject I am very close to since I am an ultra deep water drill ship Captain.  I obviously know a bit about the deep water plays but beyond what I read don't know much about shale oil.  Your writing among others has partly opened my eyes to shale oil.  When crunching the numbers it seems deepwater is a much more viable play but wanted to get your take.  Here are some numbers to just throw out.

Deepwater drilling costs per well

50mil in prep, including seismic and exploration per well.

150mil to drill a deep water well

150mil for initial production costs  

250mil for maintenance costs over the life of the well

Total cost per well 600 million

Production 7000bbls/dayx365daysx25yearsx 50 dollars per bbl = $3.2 billion > 5x investment

Shale

1mil in prep work 

12mil to drill the well

2mil in production costs and maintenance. 

Total cost 15 mil

Production 350bbls/day x 365days x 2.5years x 50 dollars per bbl = 12.7mil, a losing proposition 

I just wanted your thoughts since you spend a lot of time on shale oil but not much on deepwater except to mention it is expensive, very true.  It seems that though the shale plays can be profitable at 100 dollar oil in only produces like a flash in a pan and is very short sighted compared to deepwater conventional oil which after a significant investment in both time and money will be producing for our grandchildren.  Clearly I would be bias but an unbiased opinion would be nice.

If you have any questions for me feel free to ask.  I will do my best to answer. 

kaimu's picture
kaimu
Status: Silver Member (Offline)
Joined: Sep 20 2013
Posts: 113
RULED THUMB

Aloha! Even the rule of thumb is ruled!

We are now living in the dual realms of "securitisation" and "hypothecated" financed assets. It seems if you find an asset like shale oil and then finance it using securitised junk bonds, the Oil SubPrime, then it guarantees price will crash. The question is who is on the short side of the oil price? My guess is it will be the brokers who sold the securitized junk oil bonds! That's just way too convenient of a way to own oil assets through the back door. Who owns the GSCI? Who, by chance, is one of the largest commodity and futures and derivatives traders on the planet? If you own the index, the exchange and sell the bonds and then back all that with the AAA rating agency you own and backstop it all with the Congress you own, then you inevitably will own the rights to all the consumable assets in the world! A very nice privileged positioning for a world mired in a deflationary cycle. It's as if anti-trust laws never existed!

In the old days back in the 1970s when you went to use the toilet at a gas station the toilet seat had a paper banner on it that read "sanitized for your protection"! They've changed the wording to "securitised for your protection", but it still stinks bad enough to flush!

LesPhelps's picture
LesPhelps
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Posts: 522
Chaos Theory

Michael_Rudmin wrote:

I think that a lot of this website NEEDS to be rethought, as we discover other of our assumptions are wrong.

It is essentially given that modeling human activity and making accurate and detailed future projections may be more complicated that modeling global warming.  Take a look at how accurate those models have been over time.

To do it effectively, it seems to me, you'd have to be able to predict actions at the single individual level.  Think about how much more impact on history Winston Churchill had than say a butterfly flapping it's wings in what's left of the rain forest.  Then consider how it would be possible to predict Churchill's actions and the impact, before they happened.

It's one thing to get a gut level feel for the direction we are headed.  It's a different matter entirely to draw a precise picture of the what the future will look like.  

Chris originally emphasized that he couldn't predict the next 20 years, other than to say that it would look nothing like the last 20 years.

I think the best we can do is get a general direction of where things are headed, plan accordingly and then sit back and, to the extent possible, enjoy the ride.  

At least we might as well try to enjoy it.  It is what it is.

Doug's picture
Doug
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Posts: 3018
cheap shot

Quote:
It is essentially given that modeling human activity and making accurate and detailed future projections may be more complicated that modeling global warming.  Take a look at how accurate those models have been over time.

And like many cheap shots, wrong:

http://www.skepticalscience.com/climate-models.htm

SLR_models_obs.gif

ipcc_ar4_model_vs_obs.gif

Phaedrus the younger's picture
Phaedrus the younger
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Posts: 57
parsing the lexicon for greater clarity

I've experienced first hand the challenge in conveying the 'cheap oil' message.  In presenting this concept to coworkers several months ago, I walked them through the historical drop in EROI. Then I layered on the idea that the global economy has been and will be going through a start-stop-start volatility because the world now has reached a point where boom economies now create supply-demand prices that are not viable.

So when the price of oil imploded, several coworkers came back to say 'so, end of cheap oil, eh? heh heh'.  Which leads to me to 2 lessons learned:  they filtered out much of what I said and I was likely not as explicit on certain points as I could have been.  Example:  cost of conventional oil is still relatively cheap and there's enough of it to satisfy demand during economic contraction (for now) vs the cost of new sources which are becoming a bigger proportion of total supply during boom times.   Compounding the disconnect for most people is that the fallout of dropping oil prices in the oil industry and credit markets have enough time lag from the original price shock as to be lost on most people.

Chris' message in the CC is bang-on in macro terms.  The ongoing challenge is to refine the lexicon and nuances needed to encompass the factors behind short term volatility.

Arthur Robey's picture
Arthur Robey
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Posts: 3936
Insight into Chaos.

The best model I can come up with is offered by Chaos theory and Systems theory.

Think of self-simularity where big swings in price look just like little swings at a different scale.

There are different states that are stable. Life is a state, death is another. Venus is in a stable state. But Life is a dynamic stable state with feedback loops. Our economy was in a dynamic state, a living state. Without oil it will be in a different state, dead.

These stable states are called Strange Attractors. The measured variable does not go in a straight line from one Strange Attractor to the other.

Here is a visual of a Lawrenz Strange attractor. It is formed by plotting the measured variable's position over time. The variable orbits the two stable states- the Strange Attractors.

Systems Dynamics informs us we can expect the variable (Oil price) to slam violently as it approaches the other Strange Attractor.

Expect more volatility. This sudden drop in oil price is just such an effect. Do not expect it to last.

KugsCheese's picture
KugsCheese
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Posts: 1199
Michael_Rudmin wrote:Chris,

Michael_Rudmin wrote:
Chris, my apologies, perhaps I misunderstood what you had said in the crash course, or perhaps my IIRC was indicative that I a# not remembering correctly. I kear what you say about not being able to guess what politics may do -- you're probably right. But it also makes sense to try to model how the recent swings will impact particular industries. That is, say 'suppose the swing gets worse, how will this affect oil? Gas stations? Auto production? Employment near and far? The Pentagon? The Ruble? Medical insurance? Some of the answers will be strong and sure -- model those first. Likewise, see what will happen if the swing reverses, though initially that is unlikely.

It is probably better to look at the supply side and the problems there and how those could impact the broader economy credit system.  Jim Rickards: 

    Math class: $9T emerging market debt+$5.4T energy debt = $14.4T. A 20% mark- down (due to oil price, strong USD) = $2.9T losses = 2x Subprime in '07 

So we are probably looking at least at a 2008/2009 event but given the moar print probably much more that is not seen yet.

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Snakeeyes17
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Interesting perspective,

Interesting perspective, particularly with Bakken down to $52.56 BBL.

In defense of Chris, it is difficult to predict both oil demand (soft global economy) and the supply response from OPEC and US producers.

https://confoundedinterest.wordpress.com/2014/12/14/bakkenization-u-a-e-...

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LesPhelps
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Doug wrote: And like many

Doug wrote:

And like many cheap shots, wrong:

Not a cheap shot.  In fact it wasn't intended as a shot at all, rather a point about modeling complex system.

Without breaking a sweat you can find Global Warming enthusiasts who are dissatisfied with the reliability of predictions and statements made by the IPCC and some climate change scientists over the entire time the warnings have been being published.  

I could pick a couple of seriously embarrassing examples, similar to your picking a couple of charts you are obviously comfortable with, but what would be the point.

What is most embarrassing for the global warming movement is that people loose their jobs, are denied promotions or censured by their employers for not supporting the movement.  That smacks of religion more than science.

Another telling observation I have made is that the vast majority of people who have condescended to me on the subject have not gone nearly as far as I have to reduce their carbon footprint.  I changed because of other concerns.  They talk the talk, but don't walk the walk.  Who is doing more for the environment?

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HughK
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Examples of global warming censorship

LesPhelps wrote:

What is most embarrassing for the global warming movement is that people loose their jobs, are denied promotions or censured by their employers for not supporting the movement.  That smacks of religion more than science.

Les, I agree that it is important not to let theories become beliefs and eventually to take the place of religion itself.  While there may have been cases of censorship or other consequences for those who did not support what you call the global warming movement, there is plenty of evidence that many of those who have raised concerns about climate change have also been censored in various ways.

Those of us at PP have probably all experienced some frustration at some point when we said, "Look out, dangerous curves ahead!" and the response has been silence or worse.  Perhaps this is because the god of our time is materialism and blind faith that we will have MORE!  Like unsustainable debt buildup and peak oil, climate change is another limit to growth that challenges mainstream beliefs and often gets smacked down for doing so.  So, while some may have made climate change into a religion, a far greater number of people bow to the god of MORE.

Here are some specific examples of climate censorship:

From a blog post by George Monbiot:

If you want to know what real censorship looks like, let me show you what has been happening on the other side of the fence. Scientists whose research demonstrates that climate change is taking place have been repeatedly threatened and silenced and their findings edited or suppressed.

The Union of Concerned Scientists found that 58% of the 279 climate scientists working at federal agencies in the US who responded to its survey reported that they had experienced one of the following constraints. 1. “Pressure to eliminate the words ‘climate change,’ ‘global warming’, or other similar terms” from their communications. 2. Editing of scientific reports by their superiors which “changed the meaning of scientific findings”. 3. Statements by officials at their agencies which misrepresented their findings. 4. “The disappearance or unusual delay of websites, reports, or other science-based materials relating to climate”. 5. “New or unusual administrative requirements that impair climate-related work”. 6. “Situations in which scientists have actively objected to, resigned from, or removed themselves from a project because of pressure to change scientific findings.” They reported 435 incidents of political interference over the past five years(9).

In 2003, the White House gutted the climate change section of a report by the Environmental Protection Agency(10). It deleted references to studies showing that global warming is caused by manmade emissions. It added a reference to a study partly funded by the American Petroleum Institute, which suggested that temperatures are not rising. Eventually the agency decided to drop the section altogether.

After Thomas Knutson at the National Oceanographic and Atmospheric Administration (NOAA) published a paper in 2004 linking rising emissions with more intense tropical cyclones, he was blocked by his superiors from speaking to the media. He agreed to one request to appear on MSNBC, but a public affairs officer at NOAA rang the station to tell the programme that Knutson was “too tired” to conduct the interview. The official explained to him that the “White House said no”. All media inquiries were to be routed instead to a scientist who believed there was no connection between global warming and hurricanes(11).

Last year the top climate scientist at NASA, James Hansen, reported that his bosses were trying to censor his lectures, papers and web postings. He was told by public relations officials at the agency that there would be “dire consequences” if he continued to call for rapid reductions in greenhouse gases(12).

Last month, the Alaskan branch of the US Fish and Wildlife Service told its scientists that anyone travelling to the Arctic must understand “the administration’s position on climate change, polar bears, and sea ice and will not be speaking on or responding to these issues.”(13)

At hearings in the US Congress three weeks ago, Philip Cooney, a former aide to White House who was previously working at the American Petroleum Institute, admitted he had made hundreds of changes to government reports about climate change on behalf of the Bush administration(14). Though he is not a scientist, he had struck out evidence that glaciers were retreating and inserted phrases suggesting that there was serious scientific doubt about global warming(15).

...

Would it be terribly impolite to suggest that when those who deny that climate change is happening complain of censorship, a certain amount of projection is taking place?

The citations can be found at the original article.

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LesPhelps
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Complex System Modeling

I was looking for a model that is struggling for a simple example of complex modeling having issues.  I forgot, for a brief second that you are not allowed to question the IPCC.

First, Compare the IPCC predictions from 1990 on with the hadcrut database and tell me that the model is too accurate to be criticized.  Look at the slope of temperature change in the hadcrut database from 2001 to 2014 and tell me if the temperature is rising dangerously.

I never once denied global warming.  I deny that the science terribly accurate at this point.

Yes, you are right.  I should have said that the global warming topic is political, not religious and there have been abuses on both sides.  

This is not the topic I posted on.

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Mark Cochrane
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Walking the walk

Hello Les,

If you are walking the walk that is good enough for me regardless of what you believe about the science.

If any one wants to continue debating the climate stuff let's move it to the climate thread and get this one back to its regularly scheduled subject material!

Mark

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Michael_Rudmin
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Individual prediction not needed

I don't think that individual prediction is needed. Rather, I think that what is needed is to model each particular industry, and what impacts that industry.

One of the posters, here, is the captain of an offshore rig. He can tell you what goes into the industry, and probably can tell you the impact of various events, including war, a rise in the price of steel, and so on.

I am a project manager at a prestressed concrete plant. I can tell you what goes into our products: the steel, the fly-ash, the rubber tires (not our own product, but they are an important component of highway sound walls, which is in our range of products), the cement, the plastics, the corn syrup (not really, but sortof... as inhibitor), and so on.

If you model the situation, then you can tell how the various industries would be affected as various events develop.

That then improves your understanding of the overall situation.

I can already tell you that there is a wonderful way of handling differential relations of this type: the Parker-Sochacki solution to the Picard iteration.

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Mark Cochrane
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Tail wags dog?

Chris or anyone else,

I am just wondering if this crash in oil prices could even potentially jump start the global economy now that 'quantitative easing' has proven a spectacular failure?

In the Crash Course the sawtooth peak oil pattern has high prices crashing the economy, which crashes the prices, which stimulates the economy, which raises the oil prices which....cycle continues just never getting the economy to its former highs.

I'm not certain there is anything nefarious from the TPTB in this beyond the Saudi desire for market share but how long would this accidental energy subsidy to the global economy need to last to even potentially yield another upturn in the real economy?

Even if this happens, I think Chris convincingly has demonstrated that future demand will not be supportable at anything near current prices. I am just wondering what the signs would be of a nascent real recovery somewhere outside of the make believe stock market?

The US, China and everyone else better be topping off their strategic reserves at these prices because it is likely prices could shoot higher faster than they have dropped.

Mark

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Mark_BC
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A question for anyone who

A question for anyone who wants to answer: Do you know how the oil price is set?

I bet you don't. You think it's from genuine supply and demand fundamentals? How does that jive with recent admissions that basically every market is manipulated? Wouldn't oil, being one of the most important markets, be heavily manipulated?

As far as I understand it, the Exchange Stabilization Fund sets prices. This is basically the Fed, or whatever entity you want to call it, you know, the western banking cabal that controls the printing press and therefore every western (and thus global, for the time being) market.

They historically wanted to suppress oil price to paint a rosy picture of abundance and to help western consumers blossum and grow like flowers drinking nectar (oh wait, flowers produce nectar, bees drink it). They did this by printing up zillions of dollars and injecting them into the right places in derivatives etc. to drive the oil price down. But they couldn't just do this by itself or we'd have oil shortages as producers go bankrupt. So they also printed up zillions and injected them where they helped the oil producers "produce" without going bankrupt (the US tight oil ponzi schemes talked about so much lately). They also printed up zillions of dollars to help western debt serf slaves consume more oil (the easy credit / bond bubble of the last 30 years). This is all in the name of making the economy better.

So if they can make the oil price whatever they want, for a certain length of time at least, it seems pretty pedantic to me to be pointing after the fact and saying, "well you said she said!". And no one should go on record saying, "oil or gold price will never reach $XX dollars again!". Because anything is possible.

As far as I understand it this is how prices are set in the global markets. If someone has more insight into this then please let me know...

One thing I can guarantee though is that these low prices are not sustainable; they are an anomaly. And I also firmly believe that there is not a chance of a snowball in Hell that these price drops are all a result of some mysterious global economic crash triggering a bunch of asset deflation... where is all the deflation in other markets? Does anyone other than The Automatic Earth honestly believe that the bankers could lose control of the oil market like this, especially since so much of the marginal producers will go bankrupt and if anything, oil price has been too low even at $90 ?!?!?

Here is my hypothesis: the gold supplies have almost run out. This is consistent with Rob Kirby's insistence that the real gold price for tonnage in Asia is $2000. Anyone think the elite bankers don't know this, if true?!?!? And they are just going to sit back and say, "Oh well, I guess it will run out and we'll see what happens"???

No way, they are taking steps to maintain what power they can. Intentionally crashing this market like this is being done of purpose; to what end, I'm not sure. I'd guess because they want to buy up all the remaining oil assets on the cheap, just like I'm sure they have filled up their own private Fort Knox's with physical on the cheap as a result of their own price smashings.

They have started the controlled crash of the global economy, and I think it will get progressively less controllable as it progresses.

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Uncletommy
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It boils down to Return On Investment

As long as we continue to focus on the short term, oil prices will be a function of who and how well those in the oil patch move capital around. In the longer term, EROEI is what will be needed to cope with shrinking (?) oil supplies. There is still plenty of oil out there in the many strata layers that we are currently exploiting. The question is "Can we afford it?". 

The last "Fracked" well job I was on required 11 -  400 barrel tanks to hold the invert and other drilling fluids, two tankers of hydrochloric acid, a fleet of trucks to haul out the produced water and, of course, all the drilling infrastructure to get the job done. This was for an existing well that was about 15 years old and produced about 50 barrels a day. There were probably a total of 50 guys involved driving trucks, operating pressure units and associated fracking equipment, and support staff. Production was bumped up to 450 barrels a day. Yes, we have the technology and it is going to get better. But as your interview with Mr. Hughes explains, for how long.

Most of the energy industry pundits can argue over the pros and cons of this subject, but it will eventually come down to "where is the capital coming from". I tend to side with the Nat Hagens, Jeff Rubins, Richard Heinbergs of this debate, but realize (to quote Keynes) " In the long term, we're all going to be dead!". It is the young, up-and-comers that will be dealing with most of this debate and not us old farts that got us into this predicament in the first place.Yes, the next 20 years are going to be different than the previous, but maybe we won't notice the difference.

http://www.extraenvironmentalist.com/2014/12/14/limits-growth/

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Jbarney
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Mainstream Press

I had to search for this a bit, but it is a good article...

http://www.bloomberg.com/news/2014-12-15/oil-bust-veterans-brace-while-s...

It certainly is not as detailed as the Podcast with David Hughes.  However, it is much more in depth than I often give the mainstream media credit for.

Peace,

Jason

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Jbarney
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Podcast was Great

This podcast was excellent, btw.  In a world where many of us have concerns about peak oil, and the price of gas crashes around us, this podcast really put a lot into perspective.  I was so impressed with the level of detail, I tried to share some of the specifics with my high school economics class.  We are covering resources right now. I love accessing info from PP to help my students and my teaching along....

Jason

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darturtle
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Capital Spending Done; Market Evaporate

According to Max Keiser, back to June, energy companies' junk bonds yielded less than 6%. At that time, JNK was at its high. Shale energy companies financed their drilling easily. Capital spending reached a high gear then.

Most worked in manufacture (I do) know well that it is a nightmare - after you have done capital spending, suddenly, without warning, your market evaporate (for instance, suddenly a new product replaces yours). Now, the shale energy industry suffers similarly - suddenly, they have no hope to make money yet all debts related to capital spending remain outstanding.

They can survive for a while but cannot survive if oil price remains low for prolonged period (even if oil rebound from here to $65, they cannot survive).

As US produces 2/3 of her oil consumption domestically, as many produced at high cost (shale, deep water, etc.), low oil price is not a good news to US as to China and Japan.

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TechGuy
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Unforseen consequences of Plunging oil prices

Chris you briefly discusses some of the issues about plunging oil prices by there is another serious issue that hasn't been touched on yet: Geopoltical risks. As Oil prices plunge its increases the chances of collapsing semi-stable gov'ts and causing uprising of more militant groups like ISIS.

1. Russia is now close to another crisis, partially to do with the US's covert attack on Russia by destabilizings Russia's boarder states (ie Syria and Ukraine). Should Russia collapse into a 1990's type collapse, there are risk that a more militant or radical gov't will take over. There is also the risks that Russia's nuclear assets fall into hands of rogue miltant groups or terriorist. The US gov't has one objective: to break the back of Putin's gov't, but it fails to consider the consequences, As it did in Syria, Libya, etc. The outcome will like cause an other round of anachcy.

2. Further destabilization in the Middle East. The ME is barely hanging on with just a few gov't that haven't fallen into a state of anarchy. If either Iran, Saudia Arabia, or Pakastan falls it will almost serious problems for the industrialize world.All three of these nations likely have access to nuclear weapons that could have a devistating impact. Iran and KSA are also major exporters. If either state fails Oil production will collapses quickly. Its clear that the US and its allies and completely loss any sense of control in the Middle East. Falling prices will put ever greate pressures on the remaining stable nations. The US is simply not going to prevent further stabilization.

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