Friday, May 22, 2015

Cheap Oil Turns Out Not To Be The Economic Boon Everyone Believed

Fracking has caused more economic problems than energy solutions.

As the endless oil shale commercials proclaim on the tube, the U.S. is "now number one in oil production".  Well, actually, it's the world's largest combined producer of oil and natural gas. Also, since the frack well drilling boom erupted in 2008, U.S. oil production (mainly via shale or kerogen) has increased nearly 75 percent and natural gas production has increased 30 percent.

But has this boom translated into a national economic boost? Evidently not, according to a Denver Post account ('Cheap Oil Hurt, Didn't Help U.S. Economy', May 21, p. 13A).  There are a number of reasons why this great, expected economic boost didn't materialize:

1) It was based on the false belief that if people had more money in their pockets, from saving on gas, they'd spend more. This has turned out not to be the case as CBS finance analyst Jill Schlesinger has pointed out Americans are now saving 5.3 percent of income - nearly double what they were before the 2008 crash.  Causing even more consternation for economists, Americans are more reluctant to take on credit card debt. Thus consumer spending rose an average of just 1.9 % in the first quarter.

2) The Saudis had already lowered their prices and opened their oil spigots so the increased oil shale boom in the U.S. merely added to the existing glut and lowered prices. Indeed, according to the Post account:

"The industry's breakneck growth was thrown into reverse by a 50 percent drop in oil prices from June through January."

It should be pointed out that earlier, ca. 2008-09 when oil prices were $100 a barrel or more, hydraulic fracturing to excavate kerogen was profitable. But when prices fell below about $70 a barrel it ceased to be because that is the "breakeven" point for kerogen.

Thus, reality was instantly brought home to oil producers that oil shale is not the same quality as light, sweet crude. This exposed the brutal reality that this new form of oil embodied a decreasing energy return on energy invested (EROEI).. In other words, our energy-dependent civilization was becoming ever more impoverished as the efficiency of the energy to run it diminishes over time.

No surprise then that investment in wells and production facilities collapsed nearly 50 % last quarter. After all, construction of refineries, production facilities requires real energy input of high EROEI oil, not kerogen (which degraded stuff  is usually exported to nations like China). Thus, the ruse was up and the losing game had begun.

3) For the economy as a whole, in effect, the technological breakthroughs that originally enabled the energy industry to power its growth were now contributing to the slowdown.  The lower EROEI shale was in fact also extracting higher costs in GDP  - a subtle effect not really appreciated until author Richard Heinberg pointed it out (p. 115) in his book, 'Snake Oil: How Fracking's False Promise Imperils Our Future'  citing  a report issued by a London -based brokerage firm Tullett Prebon whose customers are mostly investment banks. In a Strategy Insight report, author Tom Morgan wrote:

"Our calculated EROEIs both for 1990 (40:1) and for 2010 (17:1) are reasonably close to the numbers cited for those years by Andrew Lees. For 2020, our projected EROEI of 11.5 to 1 is not as catastrophic as 5: 1 but would nevertheless mean that the share of GDP absorbed by energy costs would have escalated to 9.6% from about 6.7% today. Our projections further suggest energy costs would absorb as much as 15% of GDP (at an EROEI of 7.7 to 1)  by 2030."
 Morgan's report goes on to conclude that the dismal diminishing energy returns means that the economy we "have known for more than two centuries" will "cease to become viable at some point".

Energy costs absorbing as much as 15% of GDP by 2030? What does this mean? It means our present energy-intensive civilization with its HDTVs, Nooks, Ipads, Smart phones, F35 bombers, Dreamliner jets,  drones and SUVs will cease to function. To try an analogy, think of a gluttonous guy of 300 lbs, suddenly dropped on to 'Survivor Island' and forced to eat rice, a few crabs and coconuts for the rest of his life as opposed to just 39 days. Think he'd have the energy to do anything?

This gluttonous guy is the perfect metaphor for our current energy gluttonous civilization which foolishly believes it has so much energy on hand it can afford to waste major portions on unprovoked wars of choice, and stupid energy investments - such as the F35 bomber.

If anyone believes this to be make believe or hype, there is this further uncompromising fact to reckon in: last quarter's annual economic growth ( measured by GDP) dropped by more than 0.75 percent.

Other costs from oil production are hidden, such as the clean up costs and devastated environment arising from the Santa Barbara oil spill - with a damaged underground pipeline unleashing  105,000 gallons -  fouling the beaches, the ocean and aquatic life. Also, there are the mounting health costs to consider: everything from COPD (owing to breathing in frack vapors emanating from nearby wells) to cancers - including of the liver, kidneys, pancreas and colon (from drinking water contaminated by hydrocarbon frack effluent such as benzene, toluene, xylene etc.)

Will things get better? Perhaps in spurts but not permanently, i.e. extending into an indefinitely brighter energy future. Heinberg observes that while it may cost less to extract a cubic foot of natural gas or a gallon of oil shale today, it will cost much more in just five years and even more in ten - such that one would have to spend as much or more to get the energy as the benefit it delivers. Heinberg summons a point that most of the snake oil salesman humping fracking won't tell you, that it costs energy to get energy. And if you are a nation that resorts to employing 15 to 1 EROEI energy to extract  5 to 1 EROEI  oil shale energy.....well, can we say 'stupid'?

As Heinberg puts it (p. 116):

"No evidence suggests that the technology of fracking has actually raised the EROEI for natural gas production. It temporarily lowered prices but only by glutting the market."

 Heinberg's book is essentially a tour-de-force exposing the false promise of fracking with hard statistics and basic energy principles. Just as Richard Charnin's recent book on the conspiracy to kill JFK dispatches (via mathematics) the false narrative of the lone nut brigade , so Heinberg's book skewers the fake promises of the frackers.

Americans need to pay attention to these issues and inform themselves because ultimately they impact numerous aspects of our lives and how (as well as IF)  we assume responsibility as citizens. This was perfectly expressed by Jefferson in his 'Notes on Virginia':

"Every government degenerates when trusted to the rulers of the people alone. The people themselves therefore are its only safe depositories. AND TO RENDER THEM SAFE, THEIR MINDS MUST BE IMPROVED."

Are citizens' minds being improved? Only to the extent they can distinguish truth from lies, and in particular their own welfare and interests from those of the corporatists.

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