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by Ran Kohn
Numerous pundits have recently written about the second coming of oil and gas to America—“Happy Days are here again”. Are they? Is it really possible to turn the clock back to the good old days when we were gushing oil and gas in America?
On May 4, 2012 David Ignatius wrote in the Washington Post: “America is likely to become by 2020 the world’s No. 1 producer of oil, gas and biofuels — eclipsing even the energy superpowers, Russia and Saudi Arabia.” Pretty heady stuff and he gets his information from? “My expert here is Robin West, a friend who is chairman of PFC Energy, a Washington-based advisory group” to be precise an oil and gas advisory group in our nation’s capital. By the way Ignatius is not alone there have been a slew of writers coming out with the same rosy scenario.
Wow more oil and gas than Saudi Arabia? What does the most recent 2012 EIA (The US Energy Information Administration) report: “Domestic crude oil production has increased over the past few years, reversing a decline that began in 1986. U.S. crude oil production increased from 5.1 million barrels per day in 2007 to 5.5 million barrels per day in 2010. Over the next 10 years, continued development of tight oil [shale fracking], in combination with the ongoing development of offshore resources in the Gulf of Mexico, pushes domestic crude oil production in the Reference case to 6.7 million barrels per day in 2020, a level not seen since 1994. Even with a projected decline after 2020, U.S. crude oil production remains above 6.1 million barrels per day through 2035.”
Fact is: the gap between our total consumption and domestic supply has receded from 60% in 2005 to 49% in 2010. We currently consume 20 million barrels per day and adding up our domestic sources of oil, liquefied gas and biofuels was a shade under 9 million and is now a shade over 10 million barrels. Mostly its our consumption that has dropped in the aftermath of 2008. The EIA does not expect the gap to close below 36% even by 2035.
Right now Russian production is almost twice the US as is Saudi Arabia’s. We have a long way to go before we surpass them. So unless there is a sudden and unexpected dramatic drop in Russian and Saudi production the only way we will export more than them is to combine our domestic supply with the imported oil, then the total refined exported product could exceed the refined products from Russia and Saudi Arabia. But don’t confusetotal refined with actual domestic production.
The newly discovered oil and gas comes from fracking, a technology that extracts oil and gas trapped in rock formations called shale. As Gail Tverberg wrote, and she is not alone in her observations: “One characteristic of wells in tight [shale rock] formations is that production starts out very high, and then drops off quickly. Because of this, it is necessary to keep drilling new wells, or total production in an area is likely to drop off very quickly. New fracking techniques may help make the drop-off problem less severe, but it is hard to imagine that it will go away completely. If we want production to keep rising, this means that we are likely to need more and more horizontal drilling rigs, more and more fracking equipment, and more and more capital. These considerations help put a lid on how quickly and how high production can be ramped up.”
As capital needs intensify oil prices have to rise to cover the new capital needs. In other words this new supply has a built in requirement for ever increasing prices independent of supply and demand and requires us to invest more and more resources in the extraction process. In fact it is possible, one could argue it is inevitable, that the industry will create significantly greater jobs as it utilizes an increasing share of resources. It’s great for oil companies but not necessarily for the rest of us.
The oil & gas industry is correct in its claims that it can produce more oil and gas and generate more jobs. It's true that as fracking develops more jobs will be created in the process. But the industry is not being forthright about fracking leading to energy independence or lower prices at the pump--neither will happen. Consider the following, we in America were the first to massively exploit oil and gas; Europe followed in our foot steps and so did the rest of the “The western World” as it developed economically. In just the past 100 years "we" used just about 50% of all the traditional, that is non fracking, fossil fuels. In fact according to oil and gas industry sources we were at “peak oil” territory prior to the arrival of fracking. The sum total of all those generations of people in the past 100 years who made use of this technology barely add up to a billion people.
Today there are 6.8 billion people on this planet. Three billion people in China, India and South East Asia have advanced to the point where they too have the same appetite for energy as we do. To support this new demand we need 4 times the oil fields we have used to date to support all of us now—never mind tomorrow! We have enough crude for one billion people (the remaining 50% of the non fracking crude). We need an additional 3 times the current crude reserves in equivalent fracking reserves to supply the needs of the other 3 billion people in Asia who are ready.
The numbers just don’t add up. In fact a brand new IMF study suggests the price of oil will double in real terms in the next 10 years. But the oil and gas industry will be pleased to draw us into the vortex of increased investment on the false premise that we can become "energy independent" in the process—energy profits will of course skyrocket as demand is likely to outstrip the supply.
The industry has scaled as far as it can and this is good news for alternative enrgy. Historically energy sources have been replaced when they either could no longer be scaled (wood—forests were destroyed) or were no longer efficient (steam) for the task. Fracking is the signal that fossil fuels have reached their scaling limit. As the cost of “energy independence” keeps rising, people will start looking into the total life cycle cost of fossil fuel energy and come to the conclusion that the sun which rains down on us 6,000 times our energy needs is economically sunnier.