Why Are The Frackers Losing Money And Resorting To Junk Bonds To Stay Viable?

The news in The Wall Street Journal's Business and Finance Section (' Frackers Scrounge For Cash As Wall Street Shuts Spigot'', p. B1, June 7) didn't really amaze me in the least. Especially as we read:

"The companies behind the U.S. fracking boom are turning to asset sales, drilling partnerships and other alternative financing to supplement their cash flow. These forms of funding often come with higher interest rates or other downsides  - such as giving outside investors a hefty share of future oil and gas profits."

And further (p. B2):

"Producers have been forced to get creative about financing because Wall Street began shutting off the cash spigot  last year after frackers routinely failed to turn a profit over the last decade."

Worse, only a tenth -  10 percent - of large shale companies saw a positive cash flow in the first quarter of 2019.   This according to a Rystad Energy analysis of 40  drillers.  And to sustain  or increase their production these companies are having to drill new wells, as opposed to seeing greater production from each existing well .  The piece also noted some companies have become so desperate for cash to jump start new wells that they are starting to turn to junk bonds.  Well, talk about batting on a losing wicket.  But the central question here is why have the frackers - who seem to be all over the place -- failed to turn a profit over a decade?   I've explained this in earlier posts in terms of the lower energy returned on energy invested (EROEI) say compared with the light  crude oil of the past, non-shale based.

I also pointed out the difference in EROEI translated into some bad economics given the lower energy content of shale oil (kerogen) meant the frackers would always be in an energy (and hence economic)  hole.  A less efficient energy source means you have to extract more of it, and at ever higher costs given the innate diminishing returns.  It means, basically, endless reinvestment to support the losing operations.  This isn't relativity or rocket science.

The issue first surfaced some six years ago in Richard Heinberg's book, Snake Oil: How Fracking's False Promise Imperils Our Future', ( p.115).   Therein we learned from a report by a London -based brokerage firm,  Tullett Prebon:


 "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."

The 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". Cease to become viable?  Uh, yeah!  To use a human 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?  Think he'd survive? Guess again. His body - starving of protein  (the equivalent of high EROEI energy)-  would begin to consume itself.    That is effectively what our energy-gluttonous society is now doing but in the process headed toward distinct 'malnutrition"'  given the energy content of what it ingests gets lower and lower.  Think of that 300 lb. human gobbling more and more empty calories.

As Heinberg observes, 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 - whether for oil or natural gas-  with hard statistics and basic energy principles. He also shatters the myth  of "100 years of cheap  natural gas" as  effectively as he does the trope of cheaper and cheaper shale oil.   He observes, for example(p. 110), that "a study of the EROEI for electrical heating of methane hydrate deposits between 1000 and 1500 meters deep yielded ratios from 2:1 up to 5:1, depending on the source of the electricity"

The entire issue of sinking oil shale fortunes pivots on the breakeven price: that amount which the recovered oil needs to earn to have made its extraction worthwhile  If that per barrel amount tends to be below what the market offers, a loss occurs and over years the losses pile up. In many cases, as seen in recent years there is the added factor of an oil glut from over production.  In this case one has an excess supply and so oil prices tend to plummet. According to the Federal Reserve Bank of Dallas:

"The average breakeven price of oil has fallen 4 percent (or $2 per barrel) over the past year, to $50 per barrel, according to the latest Dallas Fed Energy Survey."

 This report was dated May 21st  and since then oil prices have climbed owing to the recurring Middle East instability and especially U.S. saber rattling at Iran.  Nonetheless,, given the frackers have repeatedly found themselves in such gluts, their losses have been magnified even over their inability to achieve  breakeven (in normal times).

Unmentioned until now is that whenever one has increased production which expands the existing supply beyond the current demand, a deflationary force is interjected, What this does,i.e.  in tamping down the cost at which oil can be sold, is create more problems for lower efficiency oil sources like fracking - whether in the Permian or Appalachian basins.   (There is also variability among operators;   according to the Dallas Fed survey, with the breakeven prices ranging from $23 to $70 a barrel.  This merely informs us that different operators will have differing methods of extraction, and some may be more efficient, Also, some areas may be more bountiful then others and that needs to be factored in.)

None of this detracts from the point that shale oil is a lower EROEI source and hence much more work must be done to extract it and process it (i.e.g from kerogen) and hence this inefficiency must appear in the lowered GDP over a future track, as reported by Tullet Prebon, e,g,  "Our projections further suggest energy costs would absorb as much as 15% of GDP (at an EROEI of 7.7 to 1)  by 2030."

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,  Ipads, Smart phones, F35 bombers, Dreamliner and MAX jets,  ICBMS, drones and SUVs will need to go into ever  more debt to function at the same level. That is, to produce the same energy intensive devices, products, gadgets, toys etc.  much greater manufacturing and processing costs will have to be born.  That almost certainly implies much higher levels of debt, namely for the U.S. frackers who will be unable to contend with light crude oil producers (say like the Saudis)- who enjoy far lower breakeven prices (e.g. $23- 24 per barrel).  They mostly enjoy these lower breakeven prices because that oil has a significantly (2x, 3x) higher EROEI.

The much higher processing costs for shale oil also contribute to its producers never having made profits over the past 10 years, and always seeking loans or going through the junk bond route in desperation.   Why? Look no further than the fact (from FactSet) that 40 of the largest oil and gas frackers  since 2009 have collectively spent more than $200b  more than they took in from operations.  This is an ancillary aspect to the lower EROEI and efficiency of the source.   Again, Heinberg succinctly describes the basis of the problem which one never reads about in the mainstream media:

"Kerogen is not oil. It is better thought of as an oil precursor that was insufficiently cooked by geologic processes. If we want to turn it into oil, we have to finish the process nature started: that involves heating the kerogen to a high temperature for a long time. And that in turn takes energy- lots of it, whether supplied by hydroelectricity, nuclear power plants, natural gas, or the kerogen itself. Therefore the EROEI in processing oil shale is bound to be pitifully low. According to the best study to date, by Cutler Cleveland and Peter O'Connor, the EROEI for oil shale production would be about 2:1. That tells us that oil from kerogen will be far more expensive than regular crude oil."

This is something to keep in mind as one reads more and more media accounts of how the frackers are going into debt, and basically getting nowhere fast in extracting their product and selling it beyond the breakeven threshold.  The problem for them now is getting the money to support their continued operations since "investor appetite for buying shale companies' corporate bonds has dwindled"  - leaving the companies "no choice other than to explore the junk bond markets"   There they may find the loans, but with up to 13 percent interest imposed on each one.

This isn't even just a losing wicket, but a veritable sinkhole.

Another Bloomberg 'Genius" Falls For The Myth That The U.S. Needs More People

Let's put it right out there in the open, that this country is bloody crowded with people. Here in Colorado if you decide to go to the mountains or Rocky Mountain National Park any given weekend, you are doomed to wait hours in long lines on the I-25. If you're in Miami or LA the highways are backed up 16 lanes with traffic almost all the time at peak hours. Here in Colorado Springs. unless you make reservations for most places - even 'Mom n Pop' cafes- you're likely to be out of luck. And woe betide you if you have to use an ER, you may wait for hours.

SO on basic observation the claim this country needs more people is bollocks. But here again, the economic eggheads who think they know better than anyone else, are convinced Americans need to make more babies given our decline in birthrate.  The latest one to make this argument is Bloomberg resident columnist Stephen Mihm whose piece 'Baby Bust!'  appeared in The Denver Post (front page Sunday 'Perspective', Jan. 8 )  He writes:

"Shortly before Christmas, the U.S. Census Bureau put some coal in the nation’s holiday stocking. It released data highlighting a worrisome trend: The population grew a subdued 0.7 percent, the lowest rate of growth since the Great Depression years of 1936 and 1937. Declines in the birthrate and the slowing pace of immigration are to blame.

Ask an economist why this matters, and you’ll get a welter of contradictory answers, as the relationship between population growth and economic expansion is a vexed and controversial subject. But if you sift through the historical data on the subject, it’s hard to deny that the demographic slowdown, should it continue, likely puts a damper on future economic growth."

Okay, two quick points to make at the outset. If the central argument is that the economy "needs more people" - which appears to be the case- then Mihm has already admitted (1st paragraph) that the cause need not be low birthrate, but  rather slowing immigration. This elides into another point I've made consistently in these economic arguments: that the world as a whole is overpopulated but any given nation per se may not be overpopulated. Thus, the world has more than ample people, but with different densities in different nations, regions. Hence, less densely populated places can make up for any perceived economic consequences by simply allowing more immigrants into their nations, while not increasing global population. I know this isn't popular with all the Reich wing populist nuts like Le Pen and Trump, but there it is. THAT is what you're going to have to do in an already overpopulated world.

In the OECD nations right now there are well over 230 m unemployed thanks to a combination of reasons including corporate restructuring, automation - and offloading jobs to cheaper nations.  So rather than add to the world's population burden (and the attendant environmental problems)  why not put these current unemployed back to work wherever needed? Make them 'citizen workers of the world' - since the whole market impetus is to globalization anyway.

Second, Mihm - like most of his economist brethren - misses the mark believing population is the major factor impacting economic growth. No, it is not. As I've noted before (Sept. 20, 2013), it is the decreasing energy return on energy invested (EROEI) of fuel sources. In other words, our energy-dependent civilization is becoming ever more impoverished as the efficiency of the energy to run it diminishes over time. Essentially, a nation which had become addicted to energy delivering 20 to 30 or even 40 times as much energy as it cost to extract, now faces a future with energy return 5 to 8  times less. This spells monetary-economic disaster because at the end of the day it is energy which  determines wealth of nations- money is only a medium to represent it.

A report issued by the London investment firm Tullet Prebon as recently as five years ago, and circulated via 'Strategy Insight' newsletter warned:

"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."

This shows the trend in a nutshell and it has nothing to do with population, only that increasing it globally would make matters worse because all those added people would require much more energy to live, including for fuel, food cultivation, transport etc.. And 2b more are expected by 2030.

Again, this shows the problem is not too few people but too many and the core sane solution is to redistribute them for economic maximization. This as opposed to insisting all the more developed nations have more babies.  Not to sound too hyperbolic, but that's kind of like tossing cans of gasoline on a slow burning fire.

We don't need it. But don't try to tell that to these economists! Mihm goes on to admit, however:

"these declines in the birthrate — and the larger rate of population growth — weren’t bad news in and of themselves; if anything, they seem to have been quite positive, going hand in hand with dramatic economic growth."

Well, this is not really surprising given that it costs a hell of a lot to raise a kid from birth  As per a Denver Post Business story ('Discovering What It Costs To Raise A Child') from Jan. 3rd, 2013 (p. 5K) we learn an "average middle class family will need $245, 340 over 18 years, for a child born in 2013"(From a U.S. Dept. of Agriculture 'Cost of Raising A Child' report).   And this is bound to be more expensive in the future as medical expenses will rise, and health care is much more difficult to afford (thanks to the GOP).

That chunk of moola, nearly a quarter million or what each retiree needs to cover medical expenses Medicare doesn't,  includes: "diapers, formula, child care, baby furnishings, new clothes every year, electronic computers, smart phones...and other gear and seemingly don't end when the young one finds a job".

So it's no wonder economic growth would rise if that albatross was removed from many couples' necks.  Additionally,  recall this pullback is being done in an energy environment which is regressing in terms of efficiency.  Northwestern University's Robert Gordon has posited that the Industrial  Revolution (at the turn of the 19th century) had a vastly bigger effect on productivity, economic growth than the so-called "PC revolution" in the 20th. Think about it! The former meant a transition from the impossibly laughable energy of whale oil to kerosene, coal etc., a mammoth jump in the EROEI of available energy sources. The latter transpired over a period of roughly 20 years, over which the EROEI of oil actually decreased from 16:1 to roughly 12:1. So no wonder that even millions of computers were not able to match the sheer change in productive output that accompanied the Industrial Revolution- and within the scope of the latter's purview we include the internal combustion engine, electricity, and indoor plumbing.

Gordon argues, and he's correct, that by the time the digital revolution got under way- say in the 80s- the big payoff in productivity began shrinking. Meanwhile, the PC-computing payoff basically has "come and gone" dissipating by 2004, when EROEI reached below 10:1 and fracking began as a last desperate effort to snare the vestigial ""riches" of oil - along with deep sea drilling.

We come back again to Mihm's reliance on Canadian economist Clarence Barber's study tying economic growth to a nation's population:

"In theory, immigration might have picked up the slack. While Barber didn’t address this in his study, it’s worth noting that Congress put drastic curbs on inflows of people in 1924. That year, approximately 706,000 immigrants legally entered the country. The number dropped precipitously the following year, and by 1933, the number had fallen to 23,000, a decline of almost 97 percent.
How these demographic declines set the stage for the Great Depression is hard to know with certainty, but Barber believed that the decline in birthrates among native-born Americans was sufficient to set the stage for declines in aggregate demand."

But again, I can make the symmetric argument that Barber was remiss in not factoring immigration into his work. And if this is so, then the claimed drop-offs in aggregate demand are a function of labor inputs, numbers not native birth rates.  I can vouch for my own maternal grandfather who came to the U.S. from Croatia in 1914 and had his own corner grocery operating in Depression-era Milwaukee by the mid 1920s. His business did so well he could help many native born Americans adversely affected. Hence, one cannot and must not dismiss the role of immigration, particularly in an already overpopulated world.

The solution for nations perceived to be underpopulated, then,  is to allow a larger influx of foreign workers.  To be sure, I am not elated about adding any more people to this country, because I think 300-plus million is more than enough. We already risk a large surplus labor force which can drag down pay or at least keep it stagnant. But ...if the choice is between Americans having many more babies, and allowing in more immigrants to try to enhance economic growth - I am definitely in favor of the latter!

The truth?  Increased populations only assist Neoliberal  (or conservative - like the Koch bros.) elites who can afford to live apart - in their gated enclaves- but who can profit handsomely by the vast surplus labor pools created. As investors, or even owners,  they can basically bid down wages and benefits to whatever lowball number they want, and if the peons.....errr  workers.....don't like it....they can tell them they will send the jobs to China.  Or, automate them.

In terms of providing health care to the people already residing in the U.S. this is a big deal. There is already a projected physician shortage across all specialties and at least the immigrant physicians - say from India, Jamaica, Iran etc., had been making the shortage manageable. Now, with idiot Trump's new "EO" this may be truncated, even as he's altered his "bad guys" list from 7 nations to 6 - already showing it was contrived to begin with. (Apart from which a Dept. Of Homeland Security Report from a week or so ago stated clearly no attacks of any kind came from any of those 7 nations.)

In addition, the fact that the new GOP health care plan wants to pull the rug out from underneath families shows this is not the time to have more kids. What support - health wise- will you get,  especially if your child has autism, muscular dystrophy or some other condition that demands extraordinary  medical expense?  The answer is none. So the decision not to have children  is rational in this hostile environment. One in which the majority R -party is more exercised and outraged about the unborn than protecting the health of the already born.

Oh, and protecting their financial health too while also not emulating  Jacob Chaffetz- who actually suggested if people want to afford their new Reepo health care they should not buy that new I-phone. Evidently, this monkey isn't aware that a typical premium for health care now costs $18,000 a year, compared to a few hundred bucks for an I-phone. (With blabber like this, Chaffetz is ripe for a takedown by Katherine Allen, a physician from Salt Lake City now planning to run against him.)

By the end of his piece, Mihm seems to catch a glimmer of realism but then that recedes as he writes::

"data released by the real estate firm Trulia last week indicates that the number of young people living with their parents (or siblings) recently hit levels not seen since 1940. That statistic suggests that a baby boom isn’t likely, never mind a boom in consumption fueled by the formation of new households.

But at least the U.S. still has immigration, right? Perhaps not: President-elect Donald Trump has been vocal about his opposition to illegal immigration, but since the election, he has started to send signals that he intends to crack down on legal immigration, too. If that happens, only a homemade baby boom will save us from further decline in the Trump years."

But alas, as I showed, no such "baby boom" will save us because it merely means more biologic energy "sinks" to draw on ever diminishing EROEI energy sources. In addition,  it will massively add to the debt of any families that do have more kids - given their atrocious expense- and in an environment where Repukes will be slicing all possible benefits (including healthcare) to the working and middle classes.

All it will do is speed our nation's accelerating decline, especially given the upside down economics of the Trumpites.

"Death Knell" For Peak Oil? Not So Fast!

It is easy to understand why some folks, including the nattering nabobs of the mainstream media, might somehow mistake the current glut of oil for evidence that Peak Oil is fiction or never existed at all. This would be a tragic error but as we see in today's Denver Post editorial ('The Death Knell for Peak Oil', p. 19A) it is definitely being made.

The Post's editor gushes that the "world is now awash in oil"- with Iran set to add its millions of barrels next, and in effect:

"It's as if the whole world were conspiring to bury the tattered remains of the 'peak oil' thesis so popular a few years ago."

Nowhere in his misplaced screed, not in one single paragraph, does this genius tie the consistently low economic growth rates in the advanced nations to the reduction of oil's efficiency. This is a result of having used up all the best quality oil and now going for the 'leftovers'.  As I pointed out to wifey this a.m.: "The moron doesn't even realize the shale oil we're pulling out of the ground is the next thing to garbage, which in fact proves the peak oil primary contention."

Yet the Post editor, blinded by BS, actually praises the fracked crap - devastating Colorado's landscape, air and water, btw -  as he merrily goes on:

"Little did the peak oil theorists - who insisted the planet was running out of oil- realize the shale oil revolution in the U.S. - already under way-was about to push domestic production to unforeseen heights"

First, peak oil "theorists" - like Richard Heinberg ('The Party's Over') never said the world was "running out of oil".  What they said is that the planet is running out of the highly efficient, high grade cheap oil (light sweet crude in particular) that is capable of driving the intense energy demands of industrial societies - from glass factories to military hardware and jet planes. Obviously, this point is too subtle for the editor at the Post to seemingly grasp. But let's try again to break it down for him - and others.

The planet was originally endowed with ~ 3,000 billion barrels of oil  – of which we’ve consumed one third and another one sixth of relatively cheap oil remains. Afterwards (say by 2030) there will reside another third of “break-even” oil (costs as much to access as it delivers), after which one -sixth of very expensive oil remains (costs much more to reach it than it delivers in energy).  At the heart of these considerations is the net energy eqn. (cf. Weisz, in Physics Today, July, 2004, p. 51)

Q (net) = Q (PR) – [Q (op)  + E/T]

In effect, for break-even oil one would find Q(net) = 0

For the last 700 billion barrels:    Q(net) = negative quantity =  - Q

Since the rate of energy production (Q (PR) must be debited by the energy consumed for its operation Q(op), and the energy E invested during its “lifetime” T. Thus its Q(PR) will be small in relation to the bracketed quantity.  In a similar vein, Richard Heinberg uses the quantity EROEI or ‘Energy returned on energy invested’ which for oil reached a high of 30 (ratio) in the 70s and is still the highest of all energy sources at around 22.   Thus, the problem in a nutshell is not “running out of oil’ per se but running out of CHEAP oil.

Right now, to fix ideas, we are very nearly at this Q(net) = 0 level with shale oil - which is why once its price falls to much lower than $50 /bl. it makes little economic sense to take it out of the ground. Compared to light sweet crude it is effectively garbage fuel. Bottom line, we need not run out of the stuff before the world economy runs into problems of untold, unspeakable proportions! We already have ample economic indicators showing the signs.

Alas, fracking shale oil - drilling into shale rock to get kerogen, or alternatively, natural gas, is in fact evidence of grabbing BREAK EVEN oil NOT high EROEI oil!  It is a sign of defeat and desperation.  not success - just like deep sea drilling for oil.

As Richard Heinberg explains (p. 110) it in his book, 'Snake Oil: How Fracking's False Promise Imperils Our Future':

"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."

Get that? Adding it to the total world pool of higher quality oil merely "glutted the market". This is also what's dragging your 401k down right now, though yeah, you will catch kind of a break at the pump. Let's also grasp that this crap oil isn't even used here in the U.S. it's shipped off to places like China - where it fouls their skies and creates health havoc along with the CO2 and SO2 from factories and autos.

Also (ibid.) :

"A  study of the EROEI for electrical heating of methane hydrate deposits between 1000 and 1500 meters deep yielded ratios from 2:1 up to 5:1, depending on the source of the electricity"

Regarding the promises for kerogen or oil shale, he writes: 

"Kerogen is not oil. It is better thought of as an oil precursor that was insufficiently cooked by geologic processes. If we want to turn it into oil, we have to finish the process nature started: that involves heating the kerogen to a high temperature for a long time. And that in turn takes energy- lots of it, whether supplied by hydroelectricity, nuclear power plants, natural gas, or the kerogen itself. 

Therefore the EROEI in processing oil shale is bound to be pitifully low. According to the best study to date, by Cutler Cleveland and Peter O'Connor, the EROEI for oil shale production would be about 2:1. That tells us that oil from kerogen will be far more expensive than regular crude oil."

In other words, conflating oil shale (kerogen) with actual light crude oil of high EROEI is like mixing up cow turds with cow's (calves') liver.  One can be eaten, the other can't - and for the oil - one requires additional energy inputs to put to use, the other only refining.

These are crucial points to process, but the Post editor never does as he goes on to cavil about "peak oil handwringing".   The guy would be better served having studied the issue in more depth before putting out an editorial. In particular, that Heinberg's numbers and projections are reinforced by sound sources such as the London-based brokerage firm Tullet Prebon, whose Strategic Insight report declares:

"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."

The Report goes on to note that the "diminishing dismal energy returns" (and again one needs to separate Q(PR)   from Q(net))  means that "the economy we have known for two centuries will cease to become viable at some point."

We are already seeing the initial signs in the entrenched low growth (barely 2 percent)  confounding the nation's politicos and economists who - up to now - haven't tied this to the degraded oil slopping around the world..  

Stop and think - and read - before you buy into the bullshit that cheap oil prices (or an "oil glut") mean Peak Oil is or was a myth. And should you disbelieve it, then take note of this forecast from yours truly: as high quality, efficient oil becomes ever scarcer, look for returns on investments to sink ever lower and the world economy to 'bottom out' with growth barely 1 percent per year. Look also for common goods including food to become ever more expensive since oil is the fuel needed to produce it, as well as transport it. Not to mention the water resources consumed as well.

Oh, and look for your energy bill - relatively low now - to go through the freaking ceiling when shale is exposed for the snake oil it is..

Does Cheap Oil Disprove Peak Oil? Absolutely Not!

Blogger Arun Gupta recently wrote a piece on smirkingchimp in which he claims that Peak Oil is all overblown nonsense. According to Gupta:

"Fervent peak oilers are neo-Malthusians, believing the relentless growth of population and society on their own will outstrip natural resources. While Malthus’s ideas were discredited on scientific, historical, and economic grounds in the 19th century, they live on in peak oil, peak water, peak minerals, peak soil, peak food and peak everything."

But in fact, this is emphatically true, despite Gupta lacking the education to see it. Please refer to:

http://brane-space.blogspot.com/2014/05/yes-population-growth-spurs-higher.html

And:

 http://brane-space.blogspot.com/2013/09/44-trillion-in-deficits-by-2024-minus.html

The gist of the above content is that YES- usable energy and resources are decreasing and at a clip most people don't grasp (including Gupta). But the evidence is all around including: slow economic growth, lack of new investments which help many people instead of the few, and ever increasing difficulty in obtaining oil supplies.

One of Gupta's biggest howlers in his piece is when he claims:

"The inherent flaw of peak oil is that it naturalizes capitalism. Energy reserves are determined by price, investment and technology. The current oil boom, driven by innovations in fracking and drilling, tar-sands production, low-cost investment capital and persistently high oil prices, have smashed Hubbert’s theory to bits like brittle shale."

First some background into Hubbert's theory, as Gupta accurately notes:

" Shell Oil geologist Marion King Hubbert developed peak oil theory in the 1950s, predicting domestic U.S. oil production would peak by 1970 and decline steadily thereafter. In exploiting an individual oil field, Hubbert contended, production ramps up quickly and hits a peak at about which time about half the recoverable oil has been extracted. As the oil becomes increasingly difficult and costly to pump out, the field goes into decline. Think of the production as abell-shaped curve. The top point means half is gone and half is left. But because population and the economy continue to grow, so do energy needs. Hubbert held that his theory about an individual field was applicable to the continental U.S. oil production and even the entire world, which he predicted would peak around 2000."

But hold on! In fact the evidence shows that global Peak Oil occurred around 2005-06. But what about the so-called "oil boom" due to fracking etc. It's all bogus!  It arises by conflating all oil sources as having the same efficiency to deliver energy.

At the heart of Gupta's - and many others' misunderstanding - is the failure to distinguish between different classes of oil.  Here is my effort to sum it all up, from an energy perspective, so readers can consider it the 'Cliff Notes' version of the whole story:

The planet was endowed with ~ 3,000 billion barrels of oil  – of which we’ve consumed one third and another one sixth of relatively cheap oil remains, after there will reside another third of “break-even” oil (costs as much to access as it delivers), after which one -sixth of very expensive oil remains (costs much more to reach it than it deliver in energy).  At the heart of these considerations is the net energy eqn. (cf. Weisz, in Physics Today, July, 2004, p. 51)

 

Q (net) = Q (PR) – [Q (op)  + E/T]

 

In effect, for break-even oil one would find Q(net) = 0

 

Thus, there is no net gain in energy given the quantity that must be used to obtain it.

 

For the last 700 billion barrels:    Q(net) = negative quantity =  -Q

 

Since the rate of energy production (Q (PR) must be debited by the energy consumed for its operation Q(op), and the energy E invested during its “lifetime” T. Thus its Q(PR) will be small in relation to the bracketed quantity.

In a similar vein, Richard Heinberg uses the quantity EROEI or ‘Energy returned on energy invested’ which for oil reached a high of 30 (ratio) in the 70s and is still the highest of all energy sources at around 22.   Thus, the problem in a nutshell is not “running out of oil’ per se but running out of CHEAP oil.

 Bottom line, we need not run out of the stuff before the world economy runs into problems of untold, unspeakable proportions! We already have ample economic indicators showing the signs.

“Peak Oil’ is a somewhat misleading a term, since it suggests a specific date of peak production- a common error Gupta also makes, i.e.

 

"Then there is the concept of a peak. Even though Hubbert was off by only one year—domestic production peaked in 1971—production looks nothing like his bell curve over time. It rose after each seventies shock, went into a twenty-year funk after the mid-eighties crash, and in the last five years it has soared to near its 1971 peak."

 

In the real world, the top part of the oil production curve is nearly flat (cf. A. Bartlett, Physics Today, op. cit. p. 54)  In more practical terms – what it means is that if 2005  was the actual year of peak oil production then the worldwide oil production in 2025 will be the SAME as in 1985, demanding that Q(net) > 0.   Also, it means that 2045 will be the same as 1965, and 2065 will be the same as 1945, and 2085 will be the same as 1925! All this while the population is expected to reach 9 billion or more in the SAME PERIOD! (cf. Bartlett, ibid.) In other words, as time goes on the available accessible oil constantly diminishes even as population constantly rises with the same demands.

Hubbert predicted U.S. oil production would peak around 1970,  which it did (at 2.2 liters per person per day). He also predicted world production would peak around 1995, which it would have – had the severe OPEC-induced oil crises not created an artificial supply problem in 1973, thereby pushing this critical peak back 10 years (to 2005).

 

 Some wildly optimistic prognosticators forecast predictions that 2020-2035 will the “true” date, but as Matt Savinar points out (‘Life After the Oil Crash’ p. 7), these are all based on government agencies “that admit cooking their books" - like they do with inflation and unemployment numbers. SO how can you believe them? You can't!

 

Now, let's return to the claims made for fracking. Alas, fracking oil - drilling into shale rock to get kerogen, or alternatively, natural gas, is in fact evidence of grabbing BREAK EVEN oil NOT high EROEI oil!  It is a sign of defeat and desperation.  not success - just like deep sea drilling for oil.

As Richard Heinberg explains (p. 110) it in his book, 'Snake Oil: How Fracking's False Promise Imperils Our Future':

 

"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."

 

Also (ibid.) :

 

"A  study of the EROEI for electrical heating of methane hydrate deposits between 1000 and 1500 meters deep yielded ratios from 2:1 up to 5:1, depending on the source of the electricity"

 

Regarding the promises for kerogen or oil shale, he writes:

 

"Kerogen is not oil. It is better thought of as an oil precursor that was insufficiently cooked by geologic processes. If we want to turn it into oil, we have to finish the process nature started: that involves heating the kerogen to a high temperature for a long time. And that in turn takes energy- lots of it, whether supplied by hydroelectricity, nuclear power plants, natural gas, or the kerogen itself. 

 

Therefore the EROEI in processing oil shale is bound to be pitifully low. According to the best study to date, by Cutler Cleveland and Peter O'Connor, the EROEI for oil shale production would be about 2:1. That tells us that oil from kerogen will be far more expensive than regular crude oil."

 

In other words, conflating oil shale (kerogen) with actual light crude oil of high EROEI is like mixing up cow turds with cow's (calves') liver.  One can be eaten, the other can't - and for the oil - one requires additional energy inputs to put to use, the other only refining.

 

Heinberg's numbers and projections are reinforced by sound sources such as the London-based brokerage firm Tullet Prebon, whose Strategic Insight report declares:

 

 

"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."

 

The Report goes on to note that the "diminishing dismal energy returns" (and again one needs to separate Q(PR)   from Q(net))  means that "the economy we have known for two centuries will cease to become viable at some point." In other words, far from being "capitalistic" - the Peak Oil model and meme is fiercely the opposite because it discloses there are serious limits to our use of resources. BY implication - and direct observation as here in Colo. with its 50,000 frack wells - it also means we have already passed the break even oil extraction point.

 

Obama, in addition, now evidently wants to permit deep sea drilling off the Atlantic coast, which is further evidence the break even point has been passed and we are I desperation oil extraction mode.

 

Stop and think - and read - before you buy into the bullshit that cheap oil prices mean Peak Oil is or was a myth. And should you disbelieve it, then take note of this forecast from yours truly: as high quality, efficient oil becomes ever scarcer, look for returns on investments to sink ever lower and the world economy to 'bottom out' with growth barely 1 percent per year. Look also for common goods including food to become ever more expensive since oil is the fuel needed to produce it, as well as transport it. Not to mention the water resources consumed as well.

 

Oh, and look for your energy bill - relatively low now - to go through the freaking ceiling!