Category Archives: Peak Oil

Links for the Week Ending 16 July 2014

I haven’t posted for quite a while. Basically, family commitments have eaten into my blogging time, and this state of affairs will likely continue for an indefinite period longer. Nonetheless, I will try to get some posts out as we grind through the last few innings of what I would term the ‘Great Hiatus': a hiatus period—or pause— amid the longer term trend of rising global mean temperatures, higher oil prices, increasing resource constraints and greater global economic instability.

For example, with a 70-80% chance of an El Nino by year-end, temperature records have the potential to start falling again. Further, oil has built a solid base above $100 per barrel but appears poised to go higher in the next year or so as oil companies struggle to find new fields that can be developed at the right price.

At the same time, many of the financial fragilities in the system posed by ageing demographics, declining productivity and increasing resource constraints have to date been countered by the super easy monetary policy pursued worldwide. The aggressive, unprecedented and unorthodox monetarism  led by the Federal Reserve Board has been a policy triumph over the short term. Since the credit crunch of 2008/2009, the sky has not fallen down.

Yet the jury is still out as to whether the provision of free money can be maintained long enough to see a return to sustainable economic growth, or whether it will beget a new cycle of chronic instability through having fostered the extension of credit into intrinsically poor investments and a generalized asset price inflation that benefits few but the rich.

In the meantime, here are some links which I hope will flesh out some of the themes of this blog:

  • Occasionally, my left-learning friends berate me for reading the right-of-centre Daily Telegraph. I offer two defences: first, you need to read opinion with which you may instinctively disagree, but find of some merit with a bit of reflection. Second, a good newspaper has intellectual mavericks—and The Telegraph has many (probably more than The Guardian). Here is an article by Ambrose Evans-Pritchard portraying the fossil fuel industry as poor capitalists; in short, the oil majors have been investing ever more, to reap ever less; while renewables are slowing sloughing off their subsidies. Joseph Schumpeter would be proud of this epic creative destruction.
  • And despite all the new technology we are bringing to bear on oil extraction, when fields go into decline it is damn tough fighting the tide. North Sea oil was a much ignored saviour of the British economy in the 1980s, but is decline is inexorable and, according to the Office for Budget Responsibility (OBR), accelerating. The Financial Times has the story here (access to FT articles after free registration), but if you want to go to the primary OBR source you can find it here.
  • We are still seeing a lot of commentary over “Capital in the Twenty-First Century” by Thomas Piketty. Piketty argues that the relative reduction in inequality in advanced countries over the post-war period was something of an aberration. Accordingly to his analysis, without direct political intervention (or in the most extreme case revolution), capital will gradually accrue to a relative few. In short, when the return on capital is greater than the growth rate, it is the owners of capital who prosper most, not those in capital’s employ. For a fuller treatment, I recommend Cory Doctorow’s summary here,  and an interview by Maththew Yglesias of Vox  a while back with Piketty here.
  • You can also slice growing inequality in different ways. The Institute for Fiscal Studies (IFS) in the UK has just issued a report detailing how the real incomes of young people are falling much faster than those of any other age cohort (here). Meanwhile, I have often commented on how London has detached itself form the rest of the UK. In the US, Emily Badger of The Washington Post’s Wonk Blog charts a similar divergence between cities showing a virtuous cycle of education and growth and those showing a vicious cycle of poor education and decline (here)
  • Climate sceptics love to start any global mean temperature chart with a data point centred on 1997/98, which happens to coincide with the largest El Nino for a century. This monster El Nino ushered in the record breaking hot year of 1998 (slightly eclipsed in later years depending on which data set you look at, but still one of the hottest years on record: see NASA’s data set here). Global mean temperature is a construct of short-term weather volatility, long-term green-house gas induced temperature rise and the medium-term ENSO cycle. Eventually, CO2 will do its stuff and records will fall regardless of whether we have an El Nino. But for us to quickly retire all the talk of a hiatus in temperature rise will require a new and powerful El Nino. True, an El Nino appears on the cards by year-end, but quite how strong it will be is still clouded in uncertainty as this post at Skeptical Science explains here.
  • If you visit London, take time to visit some of the quirky, smaller museums. One of the most intriguing (and downright disturbing) is the Old Operating Theatre that used to be part of St Thomas Hospital just south of The Thames. This is no Disney Land reconstruction, but a perfectly preserved part of pre-antiseptic medical history.  Despite appearing to be a set from a particularly dark Harry Potter movie scene, the Old Operating Theatre shows how and where surgeons removed a damaged limb in around two minutes flat, with minimal anaesthetic. The museum demonstrates how far we have come health-wise in an historical blink of an eye (150 years or so). And for those who would welcome an economic collapse as a route toward a more authentic form of living, I direct you to a post at Club Orlov explaining a world of post-collapse, or village, medicine. Humanity is put right back on the St Thomas Hospital’s operating table. Pray for four strong men to hold you down—and a surgeon who has not only washed his hands, but is also quick with blade and saw.

Data Watch: US Natural Gas Monthly Production February 2014

The US government agency the Energy Information Administration (EIA) issues data on U.S. natural gas production, including shale gas, on a monthly basis with a lag of roughly two months. The latest data release was made on April 30th, and covers the period up until end-February 2014. Data is reported in billion cubic feet (bcf) and can be found here. Key points:

  • February 2014 natural gas dry production: 1,896 bcf, plus 2.8% year-on-year
  • Average monthly production for the 12 months to February 2014: 2,034 bcf, +1.7% over the same period the previous year
  • Since the end of 2011, production growth has stalled (click chart below for larger image), with the year-on-year 12-month average bumping along a plateau.

U.S. Dry Gas Production Feb 14 jpeg

There was significant natural gas price volatility over the winter period due to unusually high gas demand prompted by periods of extreme cold. Critically, however, natural gas prices have remained elevated into spring at around $5 per million British thermal unit (Btu).

Natural Gas Spot Price May 14 jpeg

To put the current price of $5 in perspective, a long-term chart of natural gas prices is given below (click for larger image). Note that 1 million Btu is roughly equivalent to 1,000 cubic feet; the unit price is, therefore, comparable even though one chart refers to Btu and the other cubic feet.

U.S. Natural Gas Well Head Price April 2014 jpeg

As can be seen in the chart, two natural gas spikes took place in the 2000s, with the price temporarily moving above $10. However, the average price for the period was between $5 and $7. The current well head price has now moved into that zone. Adjusting for inflation, the current price is still cheaper than the price in the late 2000s—but not that much cheaper.

Much commentary on natural gas compares the 2012 price lows of around $2-$3 dollars with the $10 highs of the 2000s. This is very misleading and obscures the fact that shale gas is expensive to produce. My definition of a product revolution would be one with lower price and higher volume—integrated circuits being the classic case. Shale gas does not fulfil this definition. When price falls, production growth struggles; only with high price do you get production uplifts.

Nonetheless, despite U.S. gas prices trending above $5, the U.S. spot price remains significantly below the price in other markets as the chart below shows (taken from BG Group presentation here, click for larger image). Note that NBP refers to the ‘national balancing point’, the benchmark wholesale spot price of natural gas in the UK.

Global Natural Gas Prices jpeg

Until liquid natural gas (LNG) production and export facilities come on stream in the U.S., traders cannot arbitrage between domestic and international markets, so the divergence in prices will remain. When such facilities are available, the critical question is whether U.S. production can be ramped up to allow exports, and whether the volumes will be significant enough to impact on global market prices.

 

Data Watch: US and Global Crude Oil Monthly Production April 2014 Releases

On April 30th, the U.S. government agency The Energy Information Administration (EIA) announced provisional U.S. crude oil production figures for February 2014. Key points:

  • February crude oil production was 224.9 million barrels, equivalent to 8.0 million barrels per day (bpd)
  • Change over February 2013 on a barrel-per-day basis: +12.8% y/y
  • February total crude oil plus natural gas liquids reached 300.0 million barrels, equivalent to 10.7 million bpd
  • Growth continues to remain in the double digits year-on-year.

As can be seen from the chart below (click for larger image, link to original data here), the fracking of tight oil formations in the U.S. has made a major impact on U.S. crude production over the last few years.

US Field Crude Oil Production April 2014 jpeg

Given crude oil is a globally traded commodity, U.S. production numbers need to be placed in the context of world supply and demand. The International Energy Agency (IEA), in its latest Oil Market Report (OMR) dated 11 April 2014, recorded global ‘all liquids’ (oil and condensate) production of 91.8 million bpd for March 2014. Year-on-year supply growth is averaging around 1 million bpd, or a little over 1%.

OPEC and Non-OPEC Oil Supply March 2014 jpeg

Mirroring supply, benchmark crude prices continue to bump along a plateau. Increased U.S. production is being offset by a reduction in OPEC output, particularly with respect to Libya and Iraq. As a result, both WTI and Brent have remained above $100 per barrel.

Crude Futures March 2014 jpeg

Full quarterly IEA world supply-and-demand figures, including 2013 provisional supply and demand numbers, together with 2014 forecasts, can be found here. Interestingly, 2013 supply is now given as averaging 91.6 million bpd, up only 0.6 million bpd from 2012. Successive articles in the media have pronounced peak oil dead due to the fracking of shale. This story is everywhere—except in the actual numbers, where almost no increase in supply can be seen.

Links for the Week Ending 9 March 2014

Apologies for the late posting of this week’s links. Has been a crazy week.

  • For those of a non-business background, any reference to The Economist magazine with respect to climate change may appear strange. Who cares what The Economist writes on the subject? I would beg to disagree. Few, if any, senior business executives will read posts on Real Climate or Skeptical Science, let alone academic articles on the subject. For English speakers, most climate change commentary will come out of the pages (much of which will, of course, be online these days) of The Wall Street Journal, The Financial Times, other serious non-financial dailies like The New York Times in the U.S. and The Telegraph in the U.K., a motley collection of weeklies like Forbes, and, of course, The Economist. And The Economist is rather special in terms of its reach into board rooms across the globe (and for that matter cabinet offices). For example, Playboy Magazine once asked Bill Gates what he reads. The answer: “The Economist, every page”. A year ago, The Economist wrote an extended article on the global warming ‘hiatus’ that, I thought, gave too much weight to a few studies suggesting that climate sensitivity was far lower than previously thought (here, free registration). This week, however, the magazine made amends by publishing an excellent piece titled “Who pressed the pause button?” on the so called ‘hiatus’ in temperature rise. It ended with this statement:  “Most of the circumstances that have put the planet’s temperature rise on “pause” look temporary. Like the Terminator, global warming will be back.”
  • Talking of ‘The Terminator’, The Guardian carries an interview with the Crown Prince of techno-optimists and Google geek in chief Ray Kurzweil. God help us if anyone actually believes this stuff.
  • Up the road from me in Oxford is the NGO Climate Outreach and Information Network (COIN). Its founder George Marshall has an interesting blog that looks at the narratives surrounding climate change. In a post called “How the Climate Change Messengers Became Blamed for the Floods” he deconstructs the media’s reaction to the recent U.K. floods. It’s somewhat depressing stuff.
  • One of the sharpest observers of the shale hype has been the petroleum geologist Art Berman. He has a site called The Petroleum Truth Report, but, frustratingly, doesn’t keep it current. Fortunately, he has just given a new interview with Oilprice.com updating us on his recent thinking. The interview is full of gems such as this: “Oil companies have to make a big deal about shale plays because that is all that is left in the world. Let’s face it: these are truly awful reservoir rocks and that is why we waited until all more attractive opportunities were exhausted before developing them. It is completely unreasonable to expect better performance from bad reservoirs than from better reservoirs.” I highly recommend you read the whole thing.
  • The economist Noah Smith writes a lively blog called Noahpinion. In this post he makes some keen observations on the ‘jobs and robots’ debate, while in this article in The Week he compares America’s decline with the collapse of the Ming Dynasty.

So U.S. Fracking Will Save Europe from Russia?

So will U.S. shale gas save Europe from a belligerent Russia? This from The Financial Times (here, free access after registration):

The US should make it easier for Europeans to buy American natural gas in order to reduce its allies’ dependence on Russian energy, the top Republican in the House of Representatives has said.

John Boehner’s statement on Tuesday brought national security concerns into the centre of a debate on how the US should use supplies of oil and gas from its shale.

In my humble opinion, reportage on the Ukrainian crisis has generally been dire, but finding any decent analysis of the West’s reliance on Russian oil and natural gas has been especially hard. Let’s start with the big picture for gas. From the International Energy Agency‘s “Key World Energy Statistics 2013” (click for larger image):

Producers, Net Exporters, Importers Nat Gas jpeg

From the tables, we see that Russia is the second largest natural gas producer behind the U.S., but it is the world’s largest exporter. Russia also exports 28% of all it produces.

As always with energy statistics, every publication has its preferred unit of measurement, so we have to do some very simple math to compare. One cubic metre of natural gas is equivalent to 35.3 cubic feet, so Russia’s 185 billion cubic metres (bcm) of natural gas exports translates into roughly 6.5 trillion cubic feet.

And where does it go (from the Energy Information Administration‘s Russian analysis here)?

Share of Russia's Natural Gas Exports jpeg

Shale gas to the rescue? The U.S. government’s Energy Information Administration (EIA) released this graph in its “Annual Energy Outlook 2014“.

US Nat Gas Import Export 2014 jpeg

The chart shows LNG exports kicking in around 2016 and then rising to 2 trillion cubic feet in 2020 and then plateauing at approximately 3 trillion in 2025. At the same time, imports will be declining by around 1 to 2 trillion cubic feet or so.

This doesn’t entirely cover current Russian exports of 6.5 trillion cubic feet, but it is certainly a significant amount. Nonetheless, and notwithstanding the fact that U.S. LNG exports will not commence for a couple of years or more, the U.S. change in trade is material.

However, this all assumes an “other things being equal” type of world. But things will certainly not be equal going forward due to one particular country: China. From the EIA’s “International Energy Outlook 2013“.

Non OECD Asia Nat Gas Trade jpeg

Accordingly, it is a very moot question as to whether any U.S. origin LNG exports end up in Europe as opposed to the more likely destination of Asia—where insatiable demand will likely translate into premium pricing.

What about oil? Back to the IEA’s tables:

Producers, Net Exporters of Crude Oil jpeg

Now this is where it gets interesting. If Vladimir Putin decided not to play nice, then he would likely use oil to turn the screws on the West. As usual, we have a table with different units, but one metric tonne is roughly equivalent to 7.3 barrels of oil. Accordingly, Russia’s 520 million tonnes of production is around 3.8 billion barrels per year. This, in turn, is about 10.3 million barrels per day (bpd)—47% of which goes abroad. In short, he has a 5 million bpd oil cosh to beat the West.

In a recent post, I referred to the IEA’s observation that oil inventories have fallen considerably, mostly due to political troubles in Libya and Iraq, so any explicit, or even implicit, oil threat would be enough to send prices shooting higher—and global financial markets lower. Put another way, current global consumption is a little over 80 million bpd, and excess production capacity is estimated at around 1 to 2 million bpd above that. So if Putin turned the oil tap off, the global oil market would fall into a significant shortfall.

Overall, I see neither U.S. shale gas nor U.S. tight oil having any diplomatic impact on Russia. The major check on any Putin aggression will likely come from Russia’s oligarchs, who all have a major stake in the global capitalist status quo. Will that be enough? I don’t know.

Data Watch: US Natural Gas Monthly Production December 2013

The US government agency the Energy Information Administration (EIA) issues data on U.S. natural gas production, including shale gas, on a monthly basis with a lag of roughly two months. The latest data release was made on February 28th, and covers the period up until end-December 2013.

Data is reported in billion cubic feet (bcf). Key points:

  • December 2013 natural gas dry production: 2,090 bcf, plus 2.1% year-on-year
  • Average monthly production for the 12 months to December 2013: 2,023 bcf, +0.9% over the same period the previous year

Since the end of 2011, production growth has stalled (click chart below for larger image), with the year-on-year 12-month average bumping along a plateau.

US Dry Gas Production Dec 13 jpeg

Natural gas well-head prices exhibit seasonality, with winters generally seeing stronger prices due to heating needs. The recent polar-vortex induced cold snap in the U.S. has pushed prices up to their highest since February 2010 (here, click for larger image).

Natural Gas Spot Prices Mar 3 jpeg

To put the current price of $5.0 per million British thermal uni (Btu) in perspective, a longer term monthly time series going up until end December 2012 is given below (click for larger image). Note that natural gas production is very inelastic over the short term. Accordingly, the market is brought back into equilibrium during periods of strong demand through large jumps in price. However, these don’t generally prompt an investment surge in natural gas infrastructure since they are viewed as temporary in nature. Only if prices remain elevated beyond winter would we likely see a supply-side response. However, prices are already coming off their highs as we move toward spring.

US Nat Gas Well Head LT jpeg

Links for the Week Ending 2 March 2014

  • Martin Wolf has been revisiting the robots and jobs topic over the past few weeks in a couple of articles in The Financial Times here and here (free access after registration). This is a theme I have been addressing a lot recently in a series of posts starting here. Wolf finishes his last article with the observation that technology does not always have to shape institutions; it should be the other way around: “A form of techno-feudalism is unnecessary. Above all, technology itself does not dictate the outcomes. Economic and political institutions do. If the ones we have do not give the results we want, we must change them.” I agree, but this will not be easy.
  • I have also just discovered a fascinating blog that pulls together articles on the new robot economy called RobotEnomics (sic). For example, check out this post on the economic implications of driverless cars.
  • California has experienced significant rainfall over the last few days. The latest Drought Monitor (released weekly) doesn’t capture this rainfall, so we should see some slight improvement when the next update comes out. Critically though, California’s water bank—its high mountain snow pack—is still running at around 20% of average. You can see the end month figures as measured by the Department of Water Resources here and an article giving background to the snowpack hereMother Jones has some nice graphics on the crops being hurt by the drought here, while The Atlantic has a very interesting (and very long) article on the history and future of California’s massive water engineering projects here.
  • Here I go again: linking to the March 1998 Campbell and Laherrere article titled “The End of Cheap Oil” in Scientific American. The authors ended the article with this sentence “The world is not running out of oil—at least not yet. What our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend.” Average price of Brent crude in 1998: $13.2 per barrel, equivalent nowadays to around $19 after adjusting for inflation. Brent now: $109 per barrel. But isn’t fracking going to give us an endless supply of cheap oil?  Here is an article in Bloomberg titled “Dream of Oil Independence Slams Against Shale Costs”. In other words, Campbell and Laherrere continue to be proved right and the energy cornucopians continue to be proved very wrong.
  • For technological optimists the dream is for a transformational technology that can permanently alter the energy supply equation. Fusion has always been one such hope, but forever decades away from commercial development. The New Yorker has just published a superb article called “A Star in a Bottle” on the International Experimental Thermonuclear Reactor (ITER) being built in France. The audacity and scope of the project is extraordinary. Yet my takeaway from the article is that fusion provides little hope of providing a timely saviour with respect to either climate change or fossil fuel depletion.