Ex govt adviser: “global market shock” from “oil crash” could hit in 2015

Oil is not scarce. We’re nowhere near running out. What we are seeing however is diminishing returns on investment for the extraction of oil. I’m not sure if you’ve seen the news regarding the oil major’s profit warnings recently. Oil extraction has been the most profitable business in the history of the earth, but has in recent months been issuing profit warnings, with major players such as Shell having to sell assets (like drilling leases) to pay their dividends (https://www.google.co.nz/search?q=oil+majors+profit+warning) – effectively ‘eating their seed corn’ of future profitability.

Like all good businessmen, the oil majors went after low effort profits first, in the form of easy to extract reserves. Once these were depleting, they ploughed profits back into improved technology to go after the next easiest reserve, and so on. In the 1930’s in Texas for example, you could get 100 barrels of oil out for every 1 barrel you put to extraction effort. This 100:1 ‘Energy Return on Energy Investment’ (EROEI, or often EROI) gave fantastic profits. As these reserves are now declining in production, and they are having to go for reserves with much higher effort (and therefore lower EROI) to extract such as tar sands (Canada), oil sands (Venuzuala), fracking and deep sea drilling (Global), there is a decreasing profit, as the marginal cost of production (the amount it costs to extract a barrel, in both energy and monetary terms) climbs. The net result is lower profits, and lower ‘net’ energy available to society to power our current way of life. See chapters 1&3 of this book: http://www.postcarbon.org/end-of-growth-chapters/ – free to read online – for more detail.

From a recent Guardian article:

…a leaked email from Shell’s head of exploration to the CEO, Phil Watts, dated November 2003:

“I am becoming sick and tired of lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/ optimistic bookings.”

Leggett reports that after admitting that Shell’s reserves had been overstated by 20%, Watts still had to “revise them down a further three times.” The company is still reeling from the apparent failure of investments in the US shale gas boom. Last October the Financial Times reported that despite having invested “at least $24bn in so-called unconventional oil and gas in North America”, so far the bet “has yet to pay off.” With its upstream business struggling “to turn a profit”, Shell announced a “strategic review of its US shale portfolio after taking a $2.1bn impairment.” Shell’s outgoing CEO Peter Voser admitted that the US shale bet was a big regret: “Unconventionals did not exactly play out as planned.”

…Despite “soaring drilling rates,” US tight oil production has lifted “only around a million barrels a day.” As global oil consumption is at around 90 milion barrels a day, with conventional crude depleting “by over four million barrels a day of capacity each year” according to International Energy Agency (IEA) data, tight oil additions “can hardly be material in the global picture.” He reaches a similar verdict for shale gas, which he notes “contributes well under 1% of US transport fuel.”

…”Shale-gas drilling has dropped off a cliff since 2009. It is only a matter of time now before US shale-gas production falls. This is not material to the timing of a global oil crisis.”

In an interview, he goes further, questioning the very existence of a real North American ‘boom’: “How it can be that there is a prolonged and sustainable shale boom when so much investment is being written off in America – $32 billion at the last count?”

…The 2015 oil crunch forecast, Leggett writes, is corroborated by the Industry Task Force report:

“In this report we updated the evidence that defines global oil reserves and extraction rates, and concluded that the global peak production rate for oil would likely occur within the decade, very likely by 2015 at the latest – at a value no higher than 92 million barrels per day.”

Based on flow rate data, the report found that “increases in extraction would be slowing down in 2011–13 and dropping thereafter.” From then on, global oil production would drop “at 1% a year from 2015. If the then IEA forecast of demand rising to 105 million barrels a day in 2030 were to prove correct, supply would fall short in 2015.”

Ex govt adviser: “global market shock” from “oil crash” could hit in 2015 | Nafeez Ahmed | Environment | theguardian.com.

[For more on the problems with projected shale oil and shale gas output via fracking (mainstream projections are almost always from organisations with vested interests and reasons to talk up their investments), please review the free to view online serialisation of the book by Richard Heinberg (author of the much respected ‘Museletter‘): Snake Oil and a longer and more in depth technical report by David Hughes, Drill Baby Drill.]

Additional to the above issues with energy supply, we’re close to the end of the most recent 7(ish) year cycle in global financial terms. I’d just like to point out a few facts:
– The global financial crisis was in a large part the result of the aforementioned reducing net energy available to society. There are a few different ways to say this. Lacking space and time to really summarise well this here, here are a few links:  For the views of a Wharton School of Economics Professor and advisor to the EU: https://www.youtube.com/watch?v=9e0UofNMzKM (I’d only watch the first 12 minutes or so, he goes on a bit about technological fixes that I have doubts about after that), or a well known commentator with impressive credentials (http://www.financialsense.com/contributors/nicole-m-foss) http://vimeo.com/66770756#at=0, or an Actuary http://ourfiniteworld.com/2014/03/21/oil-limits-and-the-economy-one-story-not-two/, or a Professor of Engineering at Canterbury University http://www.youtube.com/watch?v=KZ5Lb_ySIEg
– We’ve done nothing to fix the underlying problems of economics. In fact, we’ve rewarded banks globally for failed business models through QE, et al, allowing them to assume a larger, and therefore more threatening role in this current cycle. For more (readable, rather than hugely technical) commentary on this to further your understanding if my statement is at all controversial, I’d highly recommend this blog’s economics posts.
– Given that they have a literal ‘license to print money’ (http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity) and that they should be insanely profitable, banking must be restructured, because they can’t even remain profitable with the cards stacked FOR them…


Why am I pointing all this out? I guess my concern is that whilst I agree with the likes of Dave Kennedy that we need to remain positive, and work towards more renewables, etc, there’s a piece missing from the story. In light of the risks I’ve outlined above, which are not discussed very much in public debate in Southland, I think we’ve got to make some choices about what our priorities are going forward.

It’s all very well saying (as I have in the past) IF we’d made serious inroads into a ‘renewables transition’ 3-4 decades ago when this was much less urgent, we’d have had time to build some m

ore of the infrastructure that is needed, but even then we’d have problems. It’s simple the case, as Susan Krumdieck makes in a recent presentation (already linked to above) that that infrastructure needs maintaining too, and that infrastructure maintenance generally requires fossil fuels at many parts of the supply chain for replacement parts, etc.

What the current popular focus on renewable energy masks, is the far more pressing need to deal with basics of survival such as water and food, particularly in light of probable failures in supply chains as a result of cascading failures in Finance, Commerce and Government that seem very likely in the coming decade, and possibly the earlier part of it…

My feeling currently is that we have got to get back to basics, producing food locally (in Southland there are a few different efforts underway to do something about this, such as ‘Love Local Charitable Trust‘ and the Farmers Market, Community Markets, etc), figuring out how drinking water supply works (hint – rainwater storage tanks…) if grid electricity becomes unreliable or unavailable (yes, Southland has Manapouri, but even that is reliant on fossil fuels for maintenance, and what about maintenance of the grid infrastructure, or even god forbid a major alpine fault earthquake, and the probable long term effects on grid electricity transmission lines in a transport fuel scarce future?), etc.

Discerning the future and responding appropriately is a very difficult task, and it’s why I’m involved with the ‘Wise Response‘ appeal, which asks government to perform a broad spectrum risk assessment, aiming to help New Zealand as a nation come to terms with the global risk environment and shape appropriate policy response. Have you given your support to the Wise Response appeal yet?

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