A New Year

We're captive on the carousel of time

We can't return we can only look

Behind from where we came

    -Joni Mitchell

Party like its 1999

   -Prince

Greetings

      I hope everyone had a nice holiday with family and friends.   Now is traditionally the time to take stock of what happened in the last year and what to expect next year.  From my perspective, the crash in oil prices has ago be the biggest event.  On the climate front, the normal amount of odd weather, and the usual internatioal meetings with little to show.  The pope's statement may be the biggest event there.

      For next year?  who knows, , as Tom Whipple points out, 2014 may be the year of the peak.  Peak liquids, including whatever oil substitute you may want to count.   See his analysis below.     If prices had remained higher, it is possible the peak could have been put off until 2016- or 2017.  However, at this project, many projects will be postponed.  see here

    I find the following graphic helpful as it shows in a general way the staircase of price , and when various liquids will make money.   From here The particular  numbers are not as important and the general picture.  For lots of nitty gritty on the various fracking areas, drilling rates, etc, I highly recommend dropping in on peak oil barrel.  Lots of data and explanations from hands on folks in the oil patch.

 The oil price crash will no doubt shake up the fracking business.  Here's Steve Kopits take away.

"For the next year, however, expect carnage on the supply side if oil prices remain at current levels for another hundred days.  By late 2015, expect a price spike as too many operators will have headed for the exits too fast.  Other than shales, as Exxon points out, the conventional supply continues to struggle.  Finding conventional oil remains 'no cheaper, no easier', and that has not changed in the last year.  If the deceleration in shale production is as severe as the EIA predicts, the global economy will be seriously short on the supply side by this time next year"

     Although, it's hard to be precise of the time frames, Chris Martenson offered a good general picture of the what you might call " falling down stairs".  The price of oil raises, makes expensive projects worthwhile, and more oil flows. The economy reacts to the higher price, it slows down, and we are swimming in oil.  The producers stop drilling, the price rises, and off we go for another round.

     

     Of course, the price of oil is only one factor, we also have central banks pumping money into the system, making money cheap, encouraging speculation.  (Interesting : "Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses".  And governments and media putting their spin on events, encouraging more shopping, in an attempt to " prime the pump".    See e.g The reason for the Surge in GNP

Will it work?   John Michael Greer doesn't think so..  He suggests that 2015 may look a lot like 2008, which is to say the end of the " boom" part of the cycle for the economy, and the beginning of the next " bust".

"As a result, as the fracking boom goes belly up, it’s not just firms in the fracking industry that will be joining it in that undignified position. In the real estate bust, a great many businesses and institutions that seemingly had nothing to do with real estate found themselves in deep financial trouble; in the fracking bust, we can count on the same thing happening—and a great deal of the resulting bankruptcies, defaults, and assorted financial chaos will likely hit in 2015.

Thus one of the entertainments 2015 has in store for us is a thumping economic crisis here in the US, and in every other country that depends on our economy for its bread and butter. The scale of the crash depends on how many people bet how much of their financial future on the fantasy of an endless frack-propelled boom, but my guess is it’ll be somewhere around the scale of the 2008 real estate bust." 

But, 2015, is not likely to be the year of the "fast crash".  Just another step down.

"It probably has to be said that this doesn’t work out to the kind of fast-crash fantasy that sees the global economy grind to a sudden stop in a matter of weeks, leaving supermarket shelves bare and so on. The events of the 2008 crash proved, if there was ever any doubt on that score, that the governments of the world are willing to do whatever it takes to keep economic activity going, and if bailing out their pals in the big banks is what’s needed, hey, that’s all in a day’s work. Now of course bailing out the big banks won’t stop the bankruptcies, the layoffs, the steep cuts to pensions, the slashing of local and state government services, and the rest of it, any more than the same thing did in the wake of the 2008 crisis, but it does guarantee that the perfect storms and worst case scenarios beloved of a certain category of collapsitarian thinkers will remain imaginative fictions.

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I know that it is getting harder all the time to believe that there really is a “peak oil crisis” lurking out there waiting to engulf our civilization and create all sorts of havoc.  Nearly every day now oil and gasoline prices are falling. We are forever told that America is on the verge of independence from foreign energy sources; that the world has decades of whatever we are burning left to burn; and climate change is something for the great-great-grandchildren to worry about. In the last five months, oil prices have fallen 40 dollars a barrel so that we Americans now have about $800 million dollars more each day to spend on something other than oil products. To top it all off, those folks whose governments don’t like us very much — Russia, Iran, Venezuela for example — are really hurting as they slide into deeper economic troubles.

Leaving aside for the moment the possibility that some exotic and as yet not fully understood source of energy will emerge in the near future, saving us from climate change, reviving the global economy, and allowing us to fly further into space, the evidence is very strong that we are still on the verge of a crisis. In fact we probably are already in it and just don’t recognize it for what it is. It is a lot easier to blame troubles on high taxes or government regulation than to admit that shortages of natural resources are driving up prices and/or cutting growth.

It is now generally accepted by those actually studying the issue that production of “conventional oil,” which is what the early “peakists” were talking about 10 or 15 years ago, really did stop growing back in about 2005-2008. Since then official “oil” production numbers have continued to climb slowly, but included in the “official” numbers as put out by the US and international agencies is not all your grandfather’s oil. Instead the compilers of our oil statistics have learned to lump all sorts of liquid hydrocarbons of varying utility together and tell us that oil in the form of “all liquids” continues to grow. Now these hydrocarbons such as natural gas liquids, biofuels, tar sands, and shale oil have uses, but they either cost considerably more to produce than conventional oil, or do not have the same energy content as conventional oil. In at least one case, “refinery gains” which are sort of like whipping up a pint of cream into gallons of whipped cream, have no additional energy in their expanded state at all. They simply fill more barrels and let us pretend we have more energy to use than we actually do.

While the financial press continues to chatter endlessly about the technological breakthroughs that have brought us millions of barrels of new shale oil, sadly they have the basics of the story wrong. It is the high prices that “oil” has been selling for in the last ten years, not the decades-old fracking technology that has allowed very expensive shale oil to be produced that is new. Even with the recent $40 per barrel price decline, oil is still selling for four times what it was going for 12 or 13 years ago. It is the surge in prices to circa $100 a barrel has allowed very expensive oil such as that from fracked shale wells, the Canadian tar sands, and deep offshore oil wells to be produced; now with oil selling for closer to $70 a barrel the question is how long oil that is no longer economic to produce will keep being extracted. The other question is just how much of our oil supply is in danger of being mothballed until prices climb again as they surely will.

The reason for the current fall in prices is still in debate. The “oil” supply has continued to creep up in recent years, but starting last June the demand for $100+ oil was no longer there. While demand in the “rich” OECD countries has been down since the 2008 oil price spike, this year it seems to be the slowing Chinese economy and its reduced demand for raw materials that has been behind the sinking demand. Many of the developing economies have been growing and using more oil each year due to growing trade with the Chinese.

Someday conventional wisdom will conclude that oil at circa $100+ a barrel was simply too much to sustain high rates of economic growth and so the growth fell taking oil demand along with it. As nearly every action has a reactive feedback, we now are likely to see some sort of economic revival in those countries that have had to import a large share of their energy during the time of higher prices. Conversely the many states that have benefited from having large quantities of excess oil to export will not be doing so well for a while.

Where we are going from here is of course the question of the day. It currently looks as if oil prices will continue to fall a bit more. The Saudis say they expect $60 a barrel will be the equilibrium place. If this happens in the next few months, then we clearly will see a reduction in the drilling for high-cost to produce oil. In the case of fracked shale oil, which requires constant drilling just to  keep production even, this means we could see a reduction in output next year despite the protestations of many shale oil drillers that this will not happen.

Should US shale oil production actually fall next year, then global “all liquids” production could fall too.  A few astute analysts are already mulling whether just perhaps 2014 will someday be recognized as the all-time high for global oil production or in other words “peak oil.” It is still years too early to pronounce that an all-time peak in what we now call “all liquids” has occurred, but it is an interesting thought.  The situation may just be worse than it seems.