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.


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