Chris Martenson: The Really, Really Big Picture

[NCR85]

http://www.peakprosperity.com/blog/8...ly-big-picture

Great defense of the peak (cheap?) oil case in the face of the recently emerging opposite public narrative. I liked this part in particular:

This first chart comes to us from the EIA courtesy of one Mr. Sweetnam, a former director at the EIA who was promptly reassigned to a distant position when his superiors discovered that this chart revealing declines in existing conventional oil fields had been released to the public.


What this graph shows is the projected decline of all known projects in 2009 (so this does not have the U.S. shale 'revolution' baked into it, but I'll get to that shortly), and it shows that those projects are going to slip from delivering 85 million barrels per day (bpd) of crude oil to just 45 million bpd between 2012 and 2030. In other words, 40 million bpd will go missing. But it's worse than that, because demand is expected to grow, leaving a gap of more than 60 million bpd by 2030.


If that sounds like a lot, it is, but that's just an assumed rate of production decline of 4.8% per year, which is right in the midzone of expert estimates. Some estimate decline rates as high as 6.5%, which would really amplify the drop and the resulting gap.


The top line is showing how much oil demand would grow if it was going to expand at the usual historical rates. The gap between those two modeled states is 43 million barrels. To put that in a U.S. shale context, the EIA projects that the domestic shale plays might deliver as much as 3 million barrels per day by 2020, which is nothing to sneeze at, but even with that there's a projected 40 million bpd shortfall.

Between 2004 and 2012, the total supply of global crude oil + condensates (a definition which excludes the non-transportation fuels known as natural gas plant liquids and biofuels) has just flopped around in a tight band with only 5% wiggle.


It bears noting here that the 2004 average spot price for crude oil (using the Brent contract, as that better defines the 'world oil' price) was $38.35/bbl, while the average 2012 spot price was $111.63, or 2.9 times higher than the 2004 price.


Despite this near tripling in price, the global supply is just sitting there stuck on a plateau. Economically speaking, this is not supposed to happen. What is supposed to happen is that suppliers will react to these higher prices and deliver more to the market, and then prices will settle down. But that hasn't happened, which indicates that global oil supplies are, as expected, constrained by something other than market forces.


This brings us to the third chart of global spending on oil projects:

What also happened during the time that global supplies of crude oil were undulating along that 5% plateau? Global expenditures on oil projects jumped by 100% from $300 billion per year to $600 billion. With a 100% increase in capital spending by the petroleum industry, we saw petroleum supplies remain more or less stuck in the exact same spot.


I am of the impression that $600 billion a year is a lot of money and that the people dedicating that capital are applying it to the very best projects available. I make the further assumption that when a project is identified and pursued, it is brought on line as rapidly as possible. There are not that many ways to look at this data other than noting that we are spending more and more to get the same...for now.


If you want to know why oil costs over $110 on the world stage, the last two charts above give you the answer: There's just not that much of it to go around.


Despite all of this effort and expense, the world is basically treading water with respect to overall production. The reason for that is contained in the first chart out of these three: The race is now on to bring new projects on line quickly enough to offset the losses from existing fields.


Petroleum is neither a U.S. issue nor any other specific country's issue, but rather a global commodity of immense importance. While the development of the shale plays in the U.S. is of domestic importance, it has not altered the global dynamic of static oil production – at least not detectably in the global supply charts. Not yet.

http://www.peakprosperity.com/blog/8...ly-big-picture

Another thing I'd personally add to this: prices have stayed high despite that a huge number of developed nations are operating far below their full output capacity. Unemployment and unused capacity should be suppressing the price, but prices are at all time highs. 2012 had the highest annual average for oil prices.

[don]

Re: Chris Martenson: The Really, Really Big Picture

Nice post, Chris

Oil optimism relying on fudged statistics

By Nafeez Mosaddeq Ahmed

Headlines about 2012's World Energy Outlook (WEO) from the International Energy Agency (IEA), released mid-November, would lead you to think we are literally swimming in oil.

The report forecasts that the United States will outstrip Saudi Arabia as the world's largest oil producer by 2017, becoming "all but self-sufficient in net terms" in energy production - a notion reported almost verbatim by media agencies worldwide, from BBC News to Bloomberg. Going even further, Damien Carrington, Head of Environment at the Guardian, titled his blog: "IEA report reminds us peak oil idea has gone up in flames."

The IEA report's general conclusions have been echoed by several other reports this year. Exxon Mobil's 2013 Energy Outlook projects that demand for gas will grow by 65% through 2040, with 20% of worldwide production from North America, mostly from unconventional sources. The shale gas revolution will make the United States a net exporter by 2025, it concludes. The US National Intelligence Council also predicts US energy independence by 2030.

This past summer saw a similar chorus of headlines around the release of a Harvard University report by Leonardo Maugeri, a former executive with the Italian oil major Eni. "We were wrong on peak oil," read environmentalist George Monbiot's Guardian headline. "There's enough to fry us all."

Monbiot's piece echoed a spate of earlier stories. In the preceding month, the BBC had asked "Shortages: Is 'Peak Oil' Idea Dead?" The Wall Street Journal pondered, "Has Peak Oil Peaked?", while the New York Time's leading environmental columnist, Andrew Revkin, took "A Fresh Look At Oil's Long Goodbye".

The gist of all this is that "peak oil" is now nothing but an irrelevant meme, out of touch with the data, and soundly disproven by the now self-evident abundance of cheap unconventional oil and gas.

Scaling the peak

Delving deeper into the available data shows that we are already in the throes of a global energy transition in which the age of cheap oil is well and truly over. For most serious analysts, far from signifying a world running out of oil, "peak oil" refers simply to the point when, due to a combination of below-ground geological constraints and above-ground economic factors, oil becomes increasingly and irreversibly more difficult and expensive to produce.

That point is now. US Energy Information Administration (EIA) data confirms that despite the United States producing a "total oil supply" of 10 million barrels per day (up by 2.1 mbd since January 2005), world crude oil production remains on the largely flat, undulating plateau it has been on since it stopped rising that very year at around 74 million barrels per day (mbd).

According to John Hofmeister, former president of Shell Oil, "flat production for the most part" over the past decade has dovetailed with annual decline rates for existing fields of about "4 to 5 million bpd". Combined with "constant growing demand" from China and emerging markets, he argues, this will underpin higher oil prices for the foreseeable future.

The IEA's WEO actually corroborates this picture, but the devil is in the largely overlooked details. First, the main reason US oil production will overtake Saudi Arabia and Russia is because their output is projected to decline, not rise as previously assumed. So while US output creeps up from 10 to 11 mbd in 2025, post-peak Saudi output will fall to 10.6 mbd and Russia to 9.5 mbd.

Second, the report's projected increase in "oil production" from 84 mbd in 2011 to 97 mbd in 2035 comes not from conventional oil, but "entirely from natural gas liquids and unconventional sources" - with conventional crude oil output (excluding light tight oil) fluctuating between 65 mbd and 69 mbd, never quite reaching the historic peak of 70 mbd in 2008 and falling by 3 mbd sometime after 2012. The IEA also does not forecast a return to the cheap oil heyday of the pre-2000 era, but rather a long-term price rise to about $125 per barrel by 2035.

Finally, oil prices would be much higher if not for the fact that governments are heavily subsidizing fossil fuels. The WEO revealed that fossil fuel subsidies increased 30% to $523 billion in 2011, masking the threat of high prices.

Therefore, world conventional oil production is already on a fluctuating plateau and we are increasingly dependent on more expensive unconventional sources. The age of cheap oil abundance is over.

Fudging figures

But there are further reasons for concern. For how reliable is the IEA's data? In a series of investigations for the Guardian and Le Monde, Lionel Badal exposed in 2009 how key data was deliberately fudged at the IEA under US pressure to artificially inflate official reserve figures. Not only that, but Badal later discovered that as early as 1998, extensive IEA data exploding assumptions of "sustained economic growth and low unemployment" had been systematically suppressed for political reasons according to several whistleblowers.

With the IEA's research under such intense US political scrutiny and interference for 12 years, its findings should perhaps not always be taken at face value.

The same goes, even more so, for Maugeri's celebrated Harvard report. By any meaningful standard, this was hardly an independent analysis of oil industry data. Funded by two oil majors - Eni and British Petroleum (BP) - the report was not peer-reviewed, and contained a litany of elementary errors. So egregious are these errors that Dr. Roger Bentley, an expert at the UK Energy Research Centre, told ex-BBC financial journalist David Strahan that "Mr Maugeri's report misrepresents the decline rates established by major studies, [and] it contains glaring mathematical errors... I am astonished Harvard published it."

What the scientists say

In contrast to the blaring media attention generated by Maugeri's report, three peer-reviewed studies published in reputable science journals in the first half of 2012 offered a less than jubilant perspective.

A paper published in Nature by Sir David King, the UK's former chief government scientist, found that despite reported increases in oil reserves and tar sands, natural gas, and shale gas production, depletion of the world's existing fields is still running at 4.5% to 6.7% per year. They firmly dismissed notions that a shale gas boom would avert an energy crisis, noting that production at shale gas wells drops by as much as 60 to 90% in the first year of operation. The paper received little, if any, media fanfare.

In March, King's team at Oxford University's Smith School of Enterprise and the Environment published another peer-reviewed paper in Energy Policy, concluding that the industry had overstated world oil reserves by about a third. Estimates should be downgraded from 1,150-1,350 billion barrels to 850-900 billion barrels.

"While there is certainly vast amounts of fossil fuel resources left in the ground," the authors argued, "the volume of oil that can be commercially exploited at prices the global economy has become accustomed to is limited and will soon decline." The study was largely blacked out in the media (except for a solitary report in the Telegraph, to its credit).

In June - the same month as Maugeri's deeply flawed analysis - Energy published an extensive analysis of oil industry data by US financial risk analyst Gail Tverberg, who found that since 2005, "world [conventional] oil supply has not increased". He argued that this was "a primary cause of the 2008-2009 recession" and that the "expected impact of reduced oil supply" will mean the "financial crisis may eventually worsen."

But all the media attention was on the oil man's oil-funded report. Tverberg's peer-reviewed study in a reputable science journal, with its somewhat darker message, was ignored.

What happens when the shale boom goes boom?

These scientific studies are not the only indications that something is deeply wrong with the IEA's assessment of prospects for shale gas production and accompanying economic prosperity. Indeed, Business Insider reports that far from being profitable, the shale gas industry is facing huge financial hurdles.

"The economics of fracking are horrid," observes US financial journalist Wolf Richter. "Production falls off a cliff from day one and continues for a year or so until it levels out at about 10% of initial production."

The result is that "drilling is destroying capital at an astonishing rate, and drillers are left with a mountain of debt just when decline rates are starting to wreak their havoc. To keep the decline rates from mucking up income statements, companies had to drill more and more, with new wells making up for the declining production of old wells. Alas, the scheme hit a wall, namely reality."

Just a few months ago, Exxon CEO Rex Tillerson complained that the lower prices resulting from the US natural gas glut were dramatically decreasing profits. This problem is compounded by the swiftly plummeting production rates at shale wells, which start high but fall fast. Although Exxon had officially insisted in shareholder meetings that it was not losing money on gas, Tillerson candidly told a meeting at the Council on Foreign Relations: "We are all losing our shirts today. We're making no money. It's all in the red."

The oil industry has actively and deliberately attempted to obscure the challenges facing shale gas production. A seminal New York Times investigation in 2011 found that despite a public stance of extreme optimism, the US oil industry is "privately skeptical of shale gas". According to the Times, "the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells."

The emails revealed industry executives, lawyers, state geologists and market analysts voicing "skepticism about lofty forecasts" and questioning "whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves". Though corroborated by independent studies, such revelations have been largely ignored by journalists and policymakers.

But we ignore them at our peril. Arthur Berman, a 32-year veteran petroleum geologist who worked with Amoco (prior to its merger with BP), on the same day as the release of the IEA's 2012 annual report, told OilPrice that "the decline rates shale reservoirs experience... are incredibly high."

Citing the Eagleford shale - the "mother of all shale oil plays" - he pointed out that the "annual decline rate is higher than 42%". Just to keep production flat, oil companies will have to drill "almost 1000 wells in the Eagleford shale, every year... Just for one play, we're talking about $10 or $12 billion a year just to replace supply. I add all these things up and it starts to approach the amount of money needed to bail out the banking industry. Where is that money going to come from?"

Chesapeake Energy recently found itself in exactly this situation, forcing it to sell assets to meet its obligations. "Staggering under high debt," reported the Washington Post, Chesapeake said "it would sell $6.9 billion of gas fields and pipelines - another step in shrinking the company whose brash chief executive had made it a leader in the country's shale gas revolution." The sale was forced by a "combination of low natural gas prices and excessive borrowing".

The worst-case scenario is that several large oil companies find themselves facing financial distress simultaneously. If that happens, according to Berman, "you may have a couple of big bankruptcies or takeovers and everybody pulls back, all the money evaporates, all the capital goes away. That's the worst-case scenario."

To make matters worse, Berman has shown conclusively that the industry exaggerated the estimated ultimate recovery (EURs) of shale wells using flawed industry models that, in turn, have fed into the IEA's future projections. Berman is not alone. Writing in Petroleum Review, US energy consultants Ruud Weijermars and Crispian McCredie argued there remains strong "basis for reasonable doubts about the reliability and durability of US shale gas reserves", which have been "inflated" under new Security & Exchange Commission rules.

The eventual consequences of the current gas glut, in other words, are more than likely to be an unsustainable shale bubble that collapses under its own weight, precipitating a supply collapse and price spike. Rather than fuelling prosperity, the shale revolution will instead boost a temporary recovery masking deeper, structural instabilities. Inevitably, those instabilities will collide, leaving us with an even bigger financial mess, on a faster trajectory toward costly environmental destruction.

So when is crunch time? According to a recent report from the New Economics Foundation, the arrival of "economic peak oil" - when the cost of supply "exceeds the price economies can pay without significantly disrupting economic activity" - will be around 2014 or 2015.

Black gold, it would seem, is not the answer to our problems.

Dr Nafeez Mosaddeq Ahmed is executive director of the Institute for Policy Research & Development and chief research officer at Unitas Communications Ltd where he leads on geopolitical risk.

http://www.atimes.com/atimes/Global_.../OA18Dj01.html

[doom&gloom]

Re: Chris Martenson: The Really, Really Big Picture

Bermand was on a recent podcast of Stansberry Radio. you can find it on iTunes.

[globaleconomicollaps]

Re: Chris Martenson: The Really, Really Big Picture

Berman was on a recent podcast of Stansberry Radio. you can find it on iTunes.

http://www.stansberryradio.com/Frank...gy-Independent