The Grand US Energy Bubble

How did the human race progress from cave dwelling to space station in such a relatively short time? Is it through our ability to learn, to build on what we have learned and then to learn from what we have built? But in this modern world, many of us have allowed that ability to become dormant, in favour of a desire for power, wealth and acquisition. And so we perhaps should not be surprised that many wealthy bankers seem to have lost the ability to learn from previous experience. Back to this later!

There has been some publicity over the last couple of years on the immense gas and oil reserves discovered in the USA, to be accessed by miraculous modern technology such as ‘fracking’ and horizontal drilling. It is proposed that the tar sands being mined in Canada will further supplement the USA’s insatiable need for fuel via the Keystone XL pipeline. We are told (by bankers?) that the USA has become self sufficient in fossil fuel for the foreseeable future. Yeah right!

The Americans (by which, of course, I mean the North Americans!) are desperate. They do not want to remain dependent on external supplies of fossil fuel. So they (including President Obama) are pulling out all the stops to avoid that dependency, with the willing help of the banks, naturally.

Let us consider the tar sands in Canada; this is actually a fascinating subject on its own. The Canadians say to the Americans, ‘if you want the crude from tar sands you have to build a pipeline (the Keystone XL pipeline) to take the crude to your refineries, otherwise we can find plenty of other customers for the crude!’ The pipeline is going to cost around $7 billion, which in the scheme of things is small change.

But to process the tar sands to produce the crude, they need copious quantities of natural gas (about a fifth of Canada’s entire production). They also need a lot of water, and a lot of diluent. Diluent? OK – to allow the stuff to flow through a pipeline it has to be diluted with some kind of light oil, which at present they are importing at a rate of up to 200,000 barrels a day. They could produce it themselves, from the bitumen they are digging up, but that is very expensive too. And by the way, there is a limit to the amount of gas they can use, because they have domestic users, as well as a binding agreement to export a proportion of the gas they produce to America! So we can deduce that production of crude from these tar sands is incredibly expensive, hardly cost effective, and about as efficient as you can get at producing greenhouse gases! Unsurprising therefore, that Canada pulled out of the Kyoto protocol!

The President long ago expressed his support for the pipeline – the only reason for a delay has been the choice of route. But the Americans are grasping at straws – the product will barely supply 10% of their daily needs, and at a massive production cost and a very small net energy gain. Globally Canadian tar sands are a drop in the ocean at massive environmental costs, and because of the restrictions on production in terms of energy, water and transport, it is hard to see a long term future for the process.

But don’t worry, the USA has its own stock of tar sands (not much), shale oil and shale gas.

It seems that this ‘revitalisation’ of the American energy industry attracted the attention of the investment bankers. I don’t pretend to have the slightest idea how investment finance works; but evidently money was poured in to the extent that production amounted to four times demand – resulting in a catastrophic drop in price, and a desperate drive to export to where prices were higher. The result has been that production costs have exceeded prices by a significant amount, resulting in a phenomenal amount of business in the mergers and acquisitions market, and thus huge profits for the banks.

Let us switch for a moment to considering the traditional and diminishing oil industry. You may remember that a gentleman called M King Hubbert produced the famous Hubberts curve in 1956, a graph which he used to predict that American oil production would peak somewhere about the late sixties or early seventies. There was much criticism and disbelief, but he was proven correct in his thinking as American oil production peaked in 1970. Hubbert was able to apply his mathematics to individual oil fields, oil producing countries and by extension to the planet, predicting that world oil production would peak in the early 21st century. Nothing yet, not even this latest alleged US bonanza, has shown him to be wrong.

You can apply Hubbert’s curve to almost any non-renewable resource; but it seems that the curve, which indicates a rise, a peak and then a decline in a roughly symmetrical format, doesn’t readily lend itself to these modern production methods. And the reason is this: the depletion rate of these wells is extremely fast, so instead of a gentle decline after the peak we have a cliff. To maintain production levels new wells need to be brought on stream all the time, at a cost of many billions of dollars. Required input annually to maintain current shale gas production in the States is around $42 billion. (Lucky we have those bankers!) Value of shale gas produced in 2012 was $32.5 billion! Shale oil is also horrendously expensive to produce and a well’s production rate will decline by in excess of 80% in the first 24 months. Tar sands produce oil at a cost of about $100 dollars per barrel, which leaves little room for profit! Many of the production sites of all these fossil fuel elements are already in decline. It seems unlikely that this 'foreseeable future' could last more than another five years or so!

The reason that Hubbert’s prognosis has proven so accurate time and time again is because, self evidently, the oil companies go for the easiest first. Thus the oil becomes progressively more difficult and more expensive to access, until you get to a point where it is no longer viable. Tar sands are not that far from that point of diminishing returns, and the great oil and gas bonanza so enthusiastically promoted by the bankers cannot possibly be other than a great big bubble!

The good news? Although carbon emissions from the USA continue to cause immense damage to our atmosphere in the short term, in the longer term that cannot continue because the bubble has to burst, and carbon emissions from the USA is certain to decrease!

And the bad news? Well… remember all that sub-prime nonsense when the house mortgage market collapsed? It is going to happen all over again with American oil reserves! I said we would come back to the bankers!

So what about our own UK shale gas reserves? I would steer clear of investment there if I were you! It will be better for us all if we just reduce our energy needs.






Data has been lifted from reports by Deborah Rogers of the Energy Policy Forum and J David Hughes of the Post Carbon Institute