The Year the Dam of Denial Breaks – Ready for the Flood?

One thousand years ago (well, next year it will be anyway) there lived a King. A king who not only ruled over England and Scotland but a large part of Northern Europe including Denmark and Norway.

He was not, as popular history would have it, a madman but a devout Christian. When the English establishment gurus told him that any king of England had authority and command over the seas, he decided to show them that was not true by placing his throne at the English sea shore and while sitting on it (his seat of power) he spoke to the waves telling them of his authority and how they were not to come up over his land and wet him. Well, as expected, he got wet.

That was of course, King Canute (or Cnut) and the experience of that day should have settled the matter. But, not twenty years later, some barmy Pom wrote the song: ‘Rule Brittania, Brittania rule the waves…’, which the English still sing at times of either stress or national pride, with all of the gusto that they can muster.

As irrelevant and blatantly incorrect as holding on to that position and belief may be, they, or some of them, still firmly cling to it.

This is not however, a purely English trait. A prominent and pertinent example of that would be that the whole world, or those portions of its population whose lives are so entwined in the modern world economy that they require and fully expect it to continue as they have always known it, purely because they think that they own and have control of it, whether that be in a very small or a great and powerful way. They share the same mindset that held eminence in the English establishment of Cnut’s time. And that is damnably difficult to shift.

Such reticence to perceive and accept reality can usually only be shifted when it is finally overcome by a much more powerful force, often a force of nature. Much as the ocean dis-contemptuously dealt with the expectations of the English when Cnut was King.

We stand today at the foreshore of reality, firmly in the belief that our civilisation, our economy, our modern way of life, our technology, our culture, our species even, is in total control of our own destiny and that we control or hold in abeyance the forces of the Natural World. After all, we have two centuries or so of ample evidence to that effect to back up our position. We have done pretty much whatever we have damn well liked over that term and Nature has not batted an eyelid in its own defense or given any indication that it cares or is in any way worried about the situation.

Or has it? Maybe subtly at first, but growing now in intensity, Nature is letting us know that it may not always tolerate what we are doing. More overtly it is gathering its forces to potentially show us just who is in charge.

I have said in the past that the year 2014 was to be the year everything changed. I think that was our ‘Last Chance Saloon’ event. We missed it.

I have also said that this year 2015 is the year the upheaval begins, and I see no reason to change that projection. Others have also come to the same conclusion.
Here is one.

Paul Gilding, an Independent writer & advisor on sustainability and owner of The Cockatoo Chronicles blog, who, from his own bio:

“has spent 35 years trying to change the world, doing everything he can think off. He’s served in the Australian military, chased nuclear armed aircraft carriers in small inflatable boats, plugged up industrial waste discharge pipes, been global CEO of Greenpeace, taught at Cambridge University, owned and run two ground-breaking sustainability focused companies and been a close confidant and advisor to the CEOs of some the world’s largest companies.”

Paul last year published the book The Great Disruption which I have just purchased, and therefore cannot comment on until I have read it, has also just published this blog post, which is well worth the read, since it deals with what I have been talking about above. Not so much what Nature has to say to us, but how the change in global mindset is about to alter, or be altered.

We alter, or we get altered. That is where Nature comes in.  Actually I will rephrase that.  We get altered whether we alter or not.  Any upheaval will not just be down to Nature but will also emanate from the forced or voluntary move away from the fossil fuel industry, which in reality means all modern industry.  That cannot be described in any other way than by using words like ‘upheaval’ and ‘disruption”.

One quotation from this piece:

“Black and white getting blacker and whiter can’t influence those who don’t want to see.”

I think this may be the longest introduction I have ever made.

Paul Gilding

This is the year the “dam of denial” will break and the momentum for climate action will become an unstoppable flood. It will be messy, confusing and endlessly debated but with historical hindsight, 2015 will be the year. The year the world turned, primarily because the market woke up to the economic threat posed by climate change and the economic opportunity in the inevitable decline of fossil fuels. That shift will in turn unlock government policy and public opinion because the previous resistance to action argued on economic grounds, will reverse to favour action on economic grounds.

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Looking Back To See The Future

I haven’t blogged here in recent times.  I find that I prefer the relative informality of my Facebook page for day-to-day blogging and I write there pretty much every day, sometimes more than once a day, with pieces of a few hundred words or more.  There is a link to my page under the My Blogs Tab if you are interested.

But today I thought of something that I think deserves to be put here.  So here goes.

I was thinking about the delicate situation with the Oil industry in recent weeks, where the world price of a barrel of oil has slipped from around $100/barrel to something less than $50/barrel.  A price not seen for a number of years.  I wondered ‘Where to from here?  There are still voices saying it could go down to $20/barrel before it starts to rise.  The daily price actually seems to bounce up and down around the $50 mark as though it doesn’t know itself anymore which way to go.  Of course it wouldn’t take much of a change in one of the parameters affecting the price to make it shoot up higher again.  What gives?

With this sort of uncertainty, how is the industry coping?  A pertinent question since our whole Western Style way of life depends largely on constant and regular output of that industry’s products, more than any other.

Anyone who has studied this situation and, importantly, has no axe to grind nor position to maintain which might distort their projected viewpoint, knows that the oil industry was in trouble and headed for inevitable eventual decline even before the price, and therefore profits, started falling.  Those with the necessary background knowledge would affirm that current production levels are only being maintained by output from non-conventional sources, and that conventional oil production worldwide plateaued and started a non-reversible decline and fall back around 2005, entirely as expected and forecast.

I am not providing references here.  What I am saying is common knowledge and can be self-referenced by anyone interested in learning the truth.

So, we, our civilisation, everything we depend on, are pretty much reliant for anything further out than what we could describe as ‘short-term’, on the continued output of non-conventional sources of oil.

I don’t think anyone could argue effectively against the idea that ‘Tight Oil’, another descriptor for non-conventional oil, is not able to turn a profit at today’s prices.  Stated differently, this means that any oil being produced now from ‘Fracking’ shale, from ‘Tar Sands’, or any other extraordinary means, is being sold at a loss.  No profit.

How long can any business continue operating at a loss?  To add to any general arguments in answer to that question, I could explain about how colossal amounts of investment is required just to keep such operations afloat and producing in acceptable quantities, but you can find that information elsewhere.

I want to direct your thought now to the idea that non-conventional oil production never was profitable even at the highest prices reached over a year ago.  Surprising statement?  Not if you look back a little way and examine what was being said back then on this very subject.

It doesn’t always pay to look backwards, at least not for long, but in this case it reveals information that we are no longer hearing in news circles or general commentary.  The public, the news media and even experts tend to have quite short memories.  That is why we need historians and historical records.  The internet is a useful tool towards that end.

We don’t have to look back very far.  I found one piece that will do for my purposes here.  I am sure that if I looked further, there are many more references that I could have used.

Take this article dated June 13, 2013 from Christopher Helman who specialises in covering the energy industry for Forbes and titled “Why America’s Shale Oil Boom Could End Sooner Than You Think”.  The whole article makes interesting reading, especially in light of what we know today, not quite two years later.  I am just going to highlight a few things, rather prophetically said there.

To start with, Helman explains that production (shale production, that is) was not keeping up commensurately with the record amounts of investment into the industry.  A very telling point even by itself.  To add clarity to that point I include here a quote from the article:

It’s bad enough to be spending more and more to generate ever less growth. It’s worse when that growth doesn’t even translate into profits.

So, not only is the process not cost-effective but it is also not profitable, even at the high prices being obtained at that particular time.  Why did that not start loud warning bells going off right then?  Maybe it did, but they were muffled enough to not cause a disturbance.

To emphasize the picture, Helman uses phrases like “…vast shale fields uneconomic to drill at all”, “…reserves that were worth $26 billion the previous year became worthless because it cost too much to drill them” and “…a 58% decline in after-tax profits in 2012 over 2011.”.  Do you feel that you are seeing a picture that was never disclosed in the broadcast news?  Is someone trying to pull the wool over our eyes?

Of course Helman is talking mainly about Natural Gas in that part, but the same companies use the same methods to mine for oil, and he says “…you’d better believe the same thing could happen to oil reserves”.

Here is another telling quote:

It’s all a function of price. West Texas Intermediate crude has been bopping around between $88 and $98 a barrel this year and the front month futures price is at $96 this week. Its high of the last two years was $109 and its low $77.

He was talking about 2013 prices and also the previous year.  Look again at current prices around $50/barrel, and back at the prices quoted above.  Even at the high point of more than twice current price, Tight Oil (Fracking, Tar Sands, etc.) could not turn a profit?  Wow!  That means that unconventional oil production has not been profitable for at least the last three or more years, perhaps never.  How long can that persist?  Why are they still doing it? (I could tell you, but that is for another time).  Why are governments and financiers supporting and investing in this?  (Oh, I think I just gave away the secret.)  

Now look at this quite apt conjecture, which I will quote without comment:

But it’s worth thinking about what could happen to the American Oil Boom if oil prices slipped just 10-15% from where they are now. Oil drilling is generating hundreds of billions of dollars of value to the United States right now, in terms of jobs and equipment, and especially the benefit to the national balance of payments of not having to spend $200 billion a year buying foreign oil. But it must be said that when you take into account all the costs incurred in acquiring and developing unconventional oil fields today, many plays are already balanced on the knife-edge of profitability, and any down draft in oil pricing could dry up activity real quick.

I am trying hard not to say anything about that so let’s move straight on to where Helman asks “What could cause prices to drop?”  He says something about continued economic woes in the US and how world oil producers may view the shale production taking place mainly in the US, following that with what I think is a remarkably prescient and prophetic passage that is so relevant to today:

If OPEC hopes to maintain any semblance of its cartel pricing power now would be the time for its members to boost their oil output, drive prices down, bankrupt marginal American producers and regain market share for the long-term.

That from Ed Hirs, a lecturer in energy economics at the University of Houston, and a member of the Yale Graduates In Energy study group, who continues:.

In short, if OPEC simply declines to reduce its own production quotas in the face of growing U.S. oil volumes, the American producers could grow themselves right out of the money.

It would pay dividends in understanding to take the time to read those two quotes again, and maybe more.  How much closer to today’s situation could Hirs have possibly foreseen back then a couple of years ago?  Truly remarkable.

Furthermore, Bernstein Research, the research arm of the huge investment management and research services group AllianceBernstein, is quoted as saying of this position, it “…is not sustainable. Either prices must rise or costs must fall.”   The costs of fracking, etc. cannot fall because they need to keep drilling faster and faster, more and more wells, just to stand still.  So, they desperately need prices to rise, not just a few tens of dollars per barrel but to exceed the highest price that has ever been set.  An unlikely event, except perhaps for a very short time period.

Bernstein, as quoted, also placed the marginal cost of non-OPEC production at $104.5 per barrel and found that the same cost for U.S. fields jumped from $89 a barrel in 2011 to $114 a barrel in 2012.  Other sources place the average production cost of non-conventional oil in the US where most of it comes from (remember this is back in 2013) would be around $80/barrel, but these figures do not generally take the cost of land acquisition into account.

Land.  That is another story.  Suffice to say that land is the only saleable commodity that a mining company, in deep financial trouble, can raise money from.  BHP for example has needed to write down billions of dollars of land that it bought for shale mining back in 2011.

There is much more to read in the linked article but I feel there has been enough said here to convince most people about the fragile condition of non-conventional oil (and gas) mining as it stands today  …and that must be a big concern for anyone with deep ties to the equally fragile modern human civilisation.

Divest, egress, leave, depart, drop out, I think are the sort of actions worth considering in relation to a way of life deeply entrenched in and dependent on oil, in all its forms.

Good luck for the future.