## Thursday, March 28, 2013

### Waiting for peak oil: a paradox

As an enthusiastic proponent of fracking, Gene sent me a link to this NBC article
Power shift: Energy boom dawning in America
that argues, among other things, that due to fracking, the U.S. will leapfrog Saudi Arabia and Russia to become the #1 fossil fuel producer by 2020. Already today, we see amazingly dropping prices of natural gas and many other things will follow. The technologies are getting better all the time. You get the point but you may find more information about these matters.

Just minutes later, I opened the blog of Alexander Ač, a crazy professional Czech and Slovak climate alarmist, any falling-sky alarmist, and peak oil champion:
Resolve the paradox (autom. transl. from Slovak)
And that was quite a contrast. Alexander lives in a different galaxy than Gene. He's waiting for peak oil every second, every day.

However, the complexities of the real world are making Alexander's waiting somewhat confusing, much like the beliefs of young rabbis in "Is Electricity Fire?", a story due to Feynman. The rabbis were trying to solve the puzzle whether the sparkling elevator was fire – an important scientific question because they wanted to know whether they could use the elevator on Saturdays.

Similarly Alexander is trying to find a maximum of a function. And it's so hard!

The paradox Alexander wants you to resolve is the discrepancy between the graph of the population-adjusted number of miles driven on all roads

and the graph of the U.S. oil production since 1922:

They just disagree! In particular, the first graph shows the holy moment Alexander has been waiting for – the maximum in June 2005. But the second graph shows nothing of the sort. It's a paradox for Alexander because in his way of looking at the world, the graphs should agree so the oil production should have peaked in 2005, too! But it didn't. Since a local minimum a few years ago, the U.S. daily oil production went up almost 30 percent.

Now, this is obviously nonsense. If we graphed the total oil production and the total oil consumption, we could get some agreement. But these two graphs are graphs of very different quantities so there is no reason why they should have maxima and local minima at the same places. In particular, the graphs have the right to differ because:
• the oil production graph is just for the U.S., a small part of the world production
• the mileage graph is a graph per capita while the oil production isn't expressed on the per-capita basis at all
• oil is used not only for vehicles but also in power plants (poor countries), production of plastic matter, fertilizers, and other things and none of the parts has to be proportional to the "whole"
• the mileage graph doesn't take the fuel consumption into account; fuel consumption increases for larger cars and in city traffic
• the mileage graph probably doesn't include the miles vehicles make outside roads, especially agricultural vehicles on the fields
• and I may have missed something equally important.
Please feel more than free to correct me and point out some difference between the graphs that is more important than the entries on my list. Which of the things is the most important one?

At any rate, a single difference above would be enough to explain differences in the locations of local extrema of the two graphs. Alexander's world view is one in which all the graphs are the same (and ideally, all of them agree with the global and local temperature and the CO2 concentration as well). It doesn't matter whether you draw barrels of oil or miles or ppm of CO2 or Celsius degrees here or there, whether the graphs are for the U.S. or the whole world, whether they're on per-capita basis or not, whether they include this or that, whether they're looking at a small fraction of the consumption or everything.

Alexander has pretended to be interested for things like oil production and oil consumption for many years but he has missed every single subtlety (well, they're not really subtleties) above. He still doesn't have the slightest clue how the world works. In fact, even when I told him about a subset of the reasons why the graphs differ and semi-joked that the mileage per capita dropped since 2005 because people begin to use Skype (and he therefore had a signal and opportunity to be more careful about the stuff he is writing), he showed another, less important aspect of his detachment from the reality. The stocks of Skype have to be going up, he said! A nice try but there are no stocks of Skype, a company that was bought by Microsoft NL in 2011 (as everyone who is getting e-mails about the "upgrade" of Windows Live Messenger to Skype knows).

Alexander believes that there may exist only one graph, the curve should probably be smooth (another nonsense but strongly believed by similar "thinkers"), and it should have a holy maximum that must be worshiped by everybody. Now, imagine how confused Alexander had to feel since the moment when he was spitted from the artificial environment of a vagina into the real world several decades ago (and he's getting increasingly confused). There are millions of graphs one may draw and each of them has different locations of the minima and maxima and his prayed-for peak oil maximum is not only non-existent but also ill-defined and utterly ludicrous and unimportant even if it could exist.

If you draw the total production or consumption – not just some per-capita figures – and if you include fracking, it's pretty clear that there won't be any peak for quite some time. Alexander will have to suffer through extra decades in which his beloved peak oil won't be coming but he will surely scream whenever he sees any blip, any foggy signal that may be misinterpreted as the Son of God of peak-oil-and-climate-armageddon-and-all-other-sky-is-falling-crackpot-stories-you-have-not-even-heard-about. He will misinterpret anything and everything that is ever seen or said as well as all the things that weren't even seen or said, hoping that his neverending sky-is-falling whining is sufficiently loud to convert his psychiatric pathologies into a reality. ;-)

1. Dear Lubos, Why are you bothering with such total idiocy?

2. If you mean AA, it's because he belongs to the "active intellectual life" surrounding the climate and fossil fuel debate in my country.

3. Lubos,

Just a minor point, but consumption of oil by the chemical/plastics industry remains a fairly constant 10% over time (further split 50/50 between the 2 industries). Otherwise a good column

4. Alexander and I don’t just live in different galaxies; his brain is directly connected to another universe with different physical laws and in which reason plays no role in thought.
What is simply breathtaking is the fact that the average wholesale price of natural gas in the US has dropped by 70%. This is absolutely unprecedented and is entirely driven by technology (fracking). Petroleum pricing on the other hand, is a global matter and is driven largely by geopolitical factors. Transportation/distribution is inexpensive for oil but natural gas pricing is a local affair in the absence of pipelines. Sea transport of liquified natural gas threatens to partially level the playing field, however. This will have significant geopolitical consequences. As fracking know-how spreads to other countries and continents we will all enjoy abundant fossil fuels, especially natural gas, for many generations.

5. Since 31 January the French government has been studying an alternative to the usual fracking: "propane fracking". Not sure this would make our greenies happy. Do you think it would be "cleaner" ?

6. Thanks for the number! I didn't know and couldn't find.

Quite a nice name in Minnesota. ;-) Do you realize it's a decidedly Czech one? The right spelling would be Zpěváček [spye-vah-czech], a little/young male singer (and perhaps a singing bird), but it's normally misspelled as Spěváček and your name is the same thing without the accents.

In fact, a competitor of my dad when he was in the laundry industry was called Lubomír Spěváček. ;-)

7. I've never heard of the difference and I will be amazed if Gene knows such things to this level of accuracy. ;-) Meanwhile, the Internet brings mixed opinions on whether or not propane fracking is safer than the water-based one:

http://www.loe.org/shows/segments.html?programID=12-P13-00025&segmentID=3

8. Great article on your first link! Propane fracking is indeed promising.
I didn't know about our French geologist Barrande (thanks for educating me ;-)

9. This is the first I’ve heard of it, Shannon but I think fracking is an exceptionally clean technology that only the worst nutcakes ca seriously question. Fracking is actually very tricky; that’s why it took so long to develop.
The key thing in fracking is to “fracture" the shale with enough micro-cracks so as to permit fluid percolation far from the bore. Making the cracks is not easy and keeping them open isn’t easy either. Given that the hydrostatic pressure at depth is north of 1000 atmospheres, propane would be injected as a liquid and would remain a liquid. Water allows a wide range of surfactants and other surface-active agents to be used; it is cheap and aqueous chemistry is very flexible. My gut reaction is that propane would be more limiting from a technical standpoint but I need to learn more.

10. I haven't read this Alexander, so cannot judge. However, I'd like your take on the following: Plot the oil production vs market price, both for pre-2005 and post-2005. You'll see a clear difference in the steepness for the two categories. Textbook difference between scarce and abundant goods.

11. Hi, interesting. Are we talking about graphs such as this one?

http://www.wtrg.com/oil_graphs/PAPRPOP.gif

The oil price has behaved wildly in recent years, indeed, and it's been driven by various emotions, including the geopolitical ones.

If you suggest that the graph above is enough to deduce whether oil is scarce or abundant, I strongly disagree. The price variations since 2005 were so intense that there's no way to predict the price in the next 5 or 20 years. The would-be exponential growth of the price one could have observed until 2007 was surely stopped, too. The production mostly grew up to 2005 and stagnated since 2005 but one finds similar periods of stagnation, e.g. in the 1970s, in the previous history as well.

Finally, the production of this old-fashioned crude oil may stagnate or even go down but the total production of fossil fuels will go up due to the fracking etc. This new technology also means a competition for the crude oil, so it will reduce the price of crude oil even if the production and reserves of crude oil will decrease. In other words, the crude oil doesn't exist in the vacuum.

12. Welcome to the world of government data reporting. First of all, it is important to point out that not all barrels of oil are the same. And not all barrels of oil production are actually a barrel of oil production. I will provide you a simple example. A barrel of heavy oil provides less of the high value products that a modern society wants, gasoline and jet fuel, than a barrel of light oil. To improve the product yield that barrel has to be cracked, a process that CONSUMES energy and leads to refinery gains, which are counted as production. The bottom line is that even though a barrel of heavy oil is less valuable and useful than a barrel of light oil the accounting makes it seem as if it were equivalent or better.

To resolve the accounting problem it makes sense to look at the production levels of different grades of oil. When we do that we find that the global production of light sweet crude peaked around the 2005 to 2007 period. Since then the decline in production of light sweet has been offset by ethanol, biofuels, shale, and other unconventional products. Now if we do not subtract the extra energy used to produce these products and count the production as equivalent to light oil we can argue that global production has yet to decline. But even so the hundreds of billions in new investment has not caused a material increase in production.

Second, you have to look at the economics of production. In the case of the US, the fracking boom has caused an increase in production but only because the producers are willing to destroy capital. Everyone has lost their shirts on shale gas and the shale oil picture is not any better.

You may ask why it is that the majors would buy money losing operations from the early shale players. As usual, the answer is government. The majors have trouble replacing reserves because there are not enough new discoveries to offset their entire annual production. But the SEC allows them to book reserves from shale formations even though the production economics are not proven. Not only that but they can use a 6:1 BTU equivalency conversion factor even though the price difference is more than 20:1. As usual we have accounting games played by companies who will do what they must to prop up their share prices.

I think that most of the health concerns about fracking are nonsense. But the economics issue is very different and has yet to be addressed by the naive optimists who are hyping the new era just as hard as they were hyping the tech and housing bubbles.

13. "What is simply breathtaking is the fact that the average wholesale price of natural gas in the US has dropped by 70%."

The problem is that the producers have blown their brains out on shale gas. That makes the process uneconomic and unsustainable, hardly the sound basis of an energy revolution.

14. Shale gas and oil are hardly abundant if you look at the economics of production.

15. OK, I’ve looked at the “living on earth” article, Lubos, and found it to be garbage, pure crap. Fracking is not a threat to groundwater so the whole article is just pointless.

The article also talks about other gases such as CO2 or nitrogen that might be used instead of propane for fracking and this is just plain stupid. Propane is a liquid at the pressures involved in fracking and using any gas is just idiocy. You would have to pump in a large volume of the gas at over 1000 atmospheres pressure! Whew! Also you could not carry and distribute the surfactants, which are critical to keeping the micro-cracks open. I now think this is bullshit, period.

Don't the people who write such crap ever think of talking to someone who actually does fracking?

I don’t know if your country has significant gas reserves but I would be very surprised if it does not. Even England has a thirty-year supply, at least!

16. Nope, Shannon; it is not promising. Sorry. The water usage is also non-issue. Most fracking wells require only a few hundred thousand gallons of water and most of this can be re-used. If ground water is not available it can be trucked in at low cost.
I have no doubt that propane might be able to make producing wells on occasion but water will work a whole lot better.

17. For more than 100 years petroleum reserves have grown faster than consumption and the gap is still widening, at an increasing rate, actually. But the really huge reserves seem to be natural gas. I think that’s a good thing!

18. Yes, there was a speculative bubble in shale gas; everyone knows that and many companies went bankrupt. There was a great deal of wishful thinking, imprudent lending and all the other things that accompany a bubble. But that is history, my friend.
You are totally wrong in saying that the fracking process is unsustainable. You may have lost your ass in an investment in Chesapeake, but the fundamentals of fracking are perfectly sound.
I expect the price of NG will rise about 30-50% as things slowly stabilize but the US will still be a net energy exporter within a decade. It is, indeed, an energy revolution.
There were 45,400 new fracking wells drilled during 2012 in the US alone and this happened after the bubble had burst!

19. What’s your point? Heavy crude is cheaper than light crude because it is worth less. So what?

20. OK Gene. Maybe our government is just trying to procrastinate as long as possible so nothing will ever be done...

21. "But that is history, my friend."

What is history are the core areas of the shale formations where profit was not difficult to obtain. Those areas were milked dry by companies trying to get as much cash flow as possible and are now mostly depleted. What is left is the higher hanging fruit that is much harder to pick.

"You are totally wrong in saying that the fracking process is unsustainable. You may have lost your ass in an investment in Chesapeake, but the fundamentals of fracking are perfectly sound. advice and stayed away from shale gas and oil production."

Actually, I took the Arthur Berman While I would love to invest in wells in the core areas where profits are to be had most shale formations are mostly uneconomic and such investments are difficult to take part in. What is left for the retail investor is not very attractive unless you want to lose money.

I do not invest in shale because the process is not economic. The EURs are far higher than what the production data is indicating, which means that the depreciation costs are far too low. Eventually the industry will write off most of its overvalued assets and the game will be over. Until then it will continue to add debt and talk about funding gaps being filled by new equity issues and sales of assets.

"I expect the price of NG will rise about 30-50% as things slowly stabilize but the US will still be a net energy exporter within a decade. It is, indeed, an energy revolution."

First, natural gas is not economic under $7.50 if you count all of the costs. Second, when the price goes over$5-$5.50 demand will fall as the utilities switch back to coal where they can. Third, the EIA well data is showing that about half the wells that could be drilled in the Bakken and some of the other formations have already been drilled. That means that the shale peak is coming up in the next 12 to 18 months for the Bakken and around 24 to 32 months for the Eagle Ford. Note that the market is on my side of this argument. Sinopec just purchased Chesapeake liquid rich assets for around$2,500 per acre, far below the $7,000 per acre valuation that Chesapeake had claimed during presentations last year. CHK is still in debt to the tune of around$12 billion and is still cash flow negative after almost a decade of shale production. That means even more sales for prices that are significantly lower than their stated book value. The company is a perfect example of how the industry operates.

The US will not be a net exporter of either oil or gas unless demand collapses as the USD loses its reserve status and producers seek to get hard currencies by selling abroad.

22. We will not be an net oil exporter; I never said that, but we will be a net NG exporter and, probably, a net energy exporter.
Of course book values have been overstated. Are you surprised by this?
Chesapeake was badly mis-managed, to be sure, but that doesn’t mean you should condemn the entire industry.
I have heard of mineral rights selling for $25,000 per acre, which is around ten times their actual value. So what? I know of one renewable three-year lease for$500 per acre in the Permian Basin, which carries a very nice five-percent royalty if it produces. I hope it does because I own a piece of it.

23. I admit to knowing nothing about your government, Shannon; I have enough trouble trying to understand ours.

24. :-) I was just listening to my president being interviewed tonight on TV and I tell you what: he has no clue where he's taking the country. He is using a nail file to cut on the state expenses and jump-start the economy... it's a chainsaw that we need !

25. Given the fact that shale gas formations require at least \$7.50 to break even outside of the core areas there is no way that the US can become a net exporter unless American domestic demand collapses. The math just does not work, particularly when you take into account the conversion process that would allow the transport of the gas by ship.

My contempt for the management of Chesapeake does not mean that I blindly oppose all shale companies. My problem is that when I look at the SEC filings and listen in on the conference calls I see exactly the same thing. Outside of the small core areas the companies cannot make money from shale and working outside of those areas is what is required to make the predictions come true.

I also tend to be a careful reader and avoid the editorial content as much as I can. When I look at the EIA data and get past the cheerleading I do not see data that supports the positive scenarios you are suggesting. The EIA seems to indicate that about half of all possible wells have already been drilled in the Bakken and we are close to that in the Eagle Ford area. Given the huge depletion rates that indicates that we are about to see production in those areas go the way of the Elm Coulee field in Montana, which used to be thrown in my face by shale supporters to oppose my scepticism until it peaked and production collapsed once the drilling slowed down. That geology was better than what we are looking at for most shale areas, which means that the production decline is likely to be a lot worse.

26. No. My point is that a barrel of heavy crude is counted as the equal of light crude and has an added refinery gain component but that the energy used to upgrade the heavy oil is not removed from the total. The accounting is bad because the units are not the same.

27. That's precisely my point. The production plateaued despite insane spikes in prices. Technically you call that a "constant" function, which means that even if you want, you can't get more. You may argue that 7 years is still too little to witness a trend. Haven't worked out the error bars, though. BTW, the link is broken.

28. I have nothing to contribute about Peak Oil, but I do have something in connection with Feynman's "Is Electricity fire?":

I understand that some Orthodox Jews in Los Angeles, esp. since the exodus from Russia, walk in the middle of the street on Friday nights to avoid turning on the lights on people's houses that go on if anyone approaches the house. They classify these lights as fire. (I wonder what they do at home. Sit there in the pitch darkness?)

I've also heard that there are debates over whether the fire in an internal combustion engine is fire for talmudic purposes.

29. LOL, it's sort of amazing that these are habits of the same nation that is producing about 50% of modern physics.

30. As far as I can tell from that graph the US oil supply still peaked in 1970 - fracking or no fracking. Wake me when this point is surpassed. Until then Hubbert was right. More to the point Campbell and Deffeyes were also right about the global consequences of peak oil (rising and volatile prices, a long production plateau before decline, rolling recessions and a increasing reliance on dirtier, more expensive forms of oil). The myriad windbags saying otherwise in the press of late are thereby wrong.

31. So let me get this straight: just because one single person's beliefs are demonstrably lacking in foundation, that means that a mathematical certainty that has been shown to be true over and over again is a myth and your belief, founded in nothing more than pure hope and optimism, is certain.

Yeah... I think I'll choose to rely on the mathematical certainty. Oil reserves don't grow on hope and optimism.

32. Also, global crude oil production per capita peaked in 1979.