Saturday, November 30, 2013

Oil and economy: The shale oil revo-illusion [Part 2]

Canadian Trends: Oil and economy: Understanding the risks [Part 1]

In part 2 of this series (boy was it stupid of me to start 2 separate series posts at the same time! Stay tuned, more Key Concepts on the way) we're going to look at shale oil and some likely affects it's going to have on short term to medium term oilsands development, profitability, as well as whether or not shale oil represents the saviour energy it's being touted to be.

Shale oil and gas: The transition fuels?

Perhaps the most popular belief about shale oil and gas is that it is a "transition fuel". With conventional oil and gas long past peak the shale revolution perhaps represents a "last chance" to power society while we transition into a new economy, and new energy systems.

The problem, though, is this isn't happening. The result of rapid shale production in the U.S. has been to simply declare the boom times are back, spending can continue, debt can be serviced, so there's no reason to worry. Yet despite the huge increase in production global oil prices are still well within the range extreme energy requires of $80 - $100. Were hearing about how the world is awash in oil yet the price seems to say a different story.

Now, I know many of you are saying.. but.. but.. manipulation! That artificial scarcity and market manipulation is solely the cause of current oil prices, and in a way it is. However, my take on the logic behind this manipulation is slightly different from the conventional thinking. It's not just "manipulated higher for greater profits", that doesn't make sense for many reasons.

First, high oil prices are not sustainable for long periods of time and a high oil price means that production prices of oil will be going up shortly afterward. This is why when referring to the cost of energy you must use energy ratios, as the currency's value is a function of the available energy. So no a higher cost in currency does not translate to more profit over the long term for extreme energy producers (though it does for conventional oil producers which is why OPEC was manipulating prices before).

So yes, when energy was a lot cheaper this logic made sense, however these days we are at the ceiling of affordability. Pushing the price higher just means you can expect a drop in price sooner which for extreme energy producers then means they are put into a situation where oil produced at a higher cost is sold at a lower price. Temporarily it could be beneficial but in the long term it'll come back to bite you.

My conclusion on the way the oil markets work is that oil is being manipulated both higher, and lower, depending on the requirements of oil producers, to ensure maximum stability of oil production. All manipulation of course only works to a point, manipulation can not overcome an overwhelming market move there just isn't enough weight behind it against natural forces on an ongoing basis.

Ok, anyway, back to the point of this section: the transition aspect. Shale oil and gas perhaps represents the greatest IQ test of humankind and our collective ability to overcome the challenges ahead, and so far we're failing, miserably.

A transition utilizing shale oil and gas and oilsands means no more "Black Fridays". These resources must be diverted and INVESTED into the transition to make it possible. This doesn't mean switching all of our cars to LNG and installing over a million new natural gas stations and the infrastructure to support them while we continue to fall behind on the cost of our oil based transportation network, the highways, the roads, the tar. We must move away from personal transport, it is unsustainable in it's current form.

We must treat these extreme energies for what they are, our children's heritage. We, the world, which largely in this case means the U.S. - squandered this generation's resource wealth on trinkets and crap. Very little has been invested into the future, in fact none of it has really been invested in the future because we're borrowing FROM the future to pay for growth now. These extreme energies represent that future, for our children, that we are now depriving them of.

These extreme energies are what the future generations are going to need to deal with the problems we've already created for them, stripping them of these resources to pay our frivolous debts not only leaves them with no wealth to actually enact change, they are also going to compound the problems they face as utilizing these energies in our wasteful society is going to cause immense damage in the form of climate change, and perhaps more directly - just plain pollution. Dirty water, dirty land.

I've written before on why any transitions are going to be a net-loss in today's economic terms. It is an investment in the future, at a cost of the future because we've squandered the wealth of today. A true transition ISN'T going to have any profit in it, none, zip, zero. It's going to cost us, and it should cost us, because we don't deserve any reward for fixing a mess of our own creation using wealth that isn't even ours. We deserve NO REWARD for waiting until the last minute though I think it can be argued now we're past the last minute and no stable transition may be possible as two scientists recently argued.

What is 'the transition' exactly?

The transition is much more than just changing the sources of energy we use. It is a change in our idea of success, dropping the GDP standard. It is a change in the way we prioritize energy and resources, ensuring that anything resources go into provide long term value for society. No more garbage products, and the highest bidder can't always win.

This all may sound somewhat draconian, and it is, or rather it would be if we attempted to implement it with rules and authoritarian control, surveillance, monitoring. This is not what I'm advocating. As I said, this is really the greatest I.Q. test of humankind, can we collectively come to the realization that changing the natural order of society is in our best interest? I don't know, but I would submit that if we are not mature enough as a species to come to the realization, then we are not mature enough as a species to accomplish the transition under any order. If the change does not come voluntarily, individually, as a result of freedom of thought then it will not come at all. It's not something that can be legislated.

A skewed value system

In our growth and debt oriented value system current extreme hydrocarbon energy is both simultaneously over and under-valued. It is over-valued in today's growth atmosphere with the bitumen bubble providing the best example. Bitumen is of a much lower quality than conventional oil and there should be a spread between bitumen and WTI. The real bitumen bubble is when the price of bitumen approaches the price of Canadian oil, it is now overvalued in today's terms with a speculative bubble on future outlooks providing the added value.

However, bitumen is also extremely undervalued as valuing these non-renewable resources on the same scale as we value all aspects of the growth economy is just plain wrong. These resources represent the difference between prosperity and poverty for future generations. These resources will be needed to maintain and provide any technological base we hope to utilize to overcome the challenges in the future. Used today to pump up GDP and the markets and service the minimum payment on debt is a dangerous, irresponsible, and ultimately futile usage of these resources. But used sparingly, responsibly, and with a focus on value-added production of long term technologies they represent the hope we have of not simply regressing back to the stone age as we keep lowering the bar to make life appear affordable.

This skewed value is even worse for shale oil and gas.

An apparent "glut" in the U.S. has dropped prices for these extreme energies to recent lows. The rapid rise in production is being compared to the very discoveries of oil and gas themselves. But they are not the same at all in terms of quality. A high quality of energy got us to where we are today, this rate of expansion simply just can not continue on a lower quality of energy.

Canadian Trends: Peak Canada? No, it's still peak oil

Why is shale a lower quality?

While "total reserves" is the most touted stat of energy, rates of production and depletion rates are much more important and paint a different story than "total reserves" initially indicates. Business Insider put out a pretty good piece on it (however I disagree with their conclusion which we'll get to). Go ahead and check out those charts, then we'll continue.

So as you can see from those charts the U.S. is "fracking up a storm" but the depletion rates of shale wells are abysmal meaning the number of wells that must be drilled is incredible, yet they've concluded that shale is here to stay because the total number of wells that can be drilled is quite large. They make a note of all the problems with it like water usage, and earth quakes, but that doesn't seem to concern them. It does for me.

Massachusetts seeks 10-yr ban on gas fracking after series of Texas quakes
A Texan tragedy: ample oil, no water

The boom is really just kicking off and already they are hitting significant limits to growth. This form of energy can not supplement conventional oil for the type of consumption we've become accustomed to. It's really as simple as that, and attempting to use it as such is a huge waste and will create an environmental debt that will take generations upon generations to repay.

Now, Mound's question on shale was related to Australia. Report questions economic benefit of shale gas extraction.
Australia may have over 1000 trillion cubic feet in undiscovered shale gas resource but the enormous cost of infrastructure needed to extract it may outweigh its economic benefit unless shale gas prices rise, a new report has found.
Like Canada, Australia lacks the infrastructure needed to seriously take a cost-advantage of the mass production of extreme energy. Of course, they're going to try anyway, and like Alberta I imagine they will use "austerity", "conservatism", accounting tricks etc to hide the true reality from their population. But like Alberta, I'm sure they'll notice that "living within their means" is getting harder and harder to accomplish no matter what the price of their resource is or how much they produce. Already their industry is working hard to hide the environmental reality.
Australia's coal seam gas industry has rejected a peer-reviewed report that suggests greenhouse gas emissions from drilling and fracking are 50 per cent worse than thought.
Shale does represent an economic threat to oilsands, and that's a good thing

Will oilsand demand be affected by shale developments? Absolutely, but ultimately I think that represents a good thing. It's a chance for Canada to utilize foreign resources and save the oilsands for future generations. It's a chance for Canada to transition at a relatively cheap cost utilizing the stupidity of other nations and their desire to get all of their resources out the door in exchange for U.S. debt as Canada is doing currently.

More than any other country, I think the shale boom represents a last chance for Canada to take advantage of the future and make the needed changes now. A 100 year plan of strategic investment in our children's future is what's called for. The world is providing the perfect opportunity for us at a cost to themselves and we'd be stupid not to take it. Let's import shale oil from the U.S. and slow oilsands development right down. Let's savour the massive bounty of resources we've been blessed with.

Low oil prices are affordable prices, and our government has been working hard to make Canadians forget that fact. Investment in our future is best done when energy is cheapest and right now energy is the cheapest that it's going to be for the foreseeable future. We can either take the opportunity in front of us or we can chase U.S. debt down the extreme energy rabbit hole of the American Jesus and squander everything we've got left in the process. It's our choice, that's the beauty of freedom.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for CenturyLink

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

1 comment:

  1. Thanks for this, Richard. Full disclosure - it's going to take me a while to digest everything you've set out in this and the previous part. You and I share many beliefs. We both believe that we have shamelessly stolen the future from generations of Canadians to come. We have taken the good and left them with the debris.

    I have spent the past decade reducing my energy consumption. I've grown 'smaller' - smaller house, smaller (fuel efficient/low emissions) car, reduced annual driving by more than half, I use local scrap wood (logging discards) to heat my house on colder days, I have replaced my windows to reduce heat loss and maximize natural ventilation on hot days. Ten, twenty years ago I would have thought these changes were 'sacrifices.' You can grow smaller and have as good a quality of life or better.

    That's the key to steady state or Full Earth economics. You don't need growth in production or consumption to improve your quality of life. Qualitative growth is a better solution to quantitative growth and can enhance enjoyment of life.

    I still don't know how we decouple the Canadian economy from the fossil fuel sector domination. Where is the political will - from the Liberals or New Democrats?

    Richard, thanks again. I'll be back with more comments and questions.