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Page added on July 31, 2013
Commodity supercycle in rude health despite shale
The Oil Drum is closing down after eight years, giving up the long struggle to alert us all to “peak oil” and the dangers of an energy crunch. Readers have been drifting away. The theme has gone out of fashion, eclipsed by shale and fracking in the US.
The demise of Britain’s leading website for oil dissidents has been seized on by critics as an admission that peak oil is just another malthusian myth like so many before. It comes amid a spate of reports from global banks announcing the death of the commodity supercycle, slain by creative technology and a surge of new supply.
Yet if you stand back, it is hardly evident that the world is again enjoying abundant sources of cheap energy, metals or indeed food. Commodity prices have held up remarkably well given that we are in a global trade depression, albeit one contained by monetary stimulus.
The eurozone is in the longest unbroken recession since the 1930s, with industrial production 13pc below the pre-Lehman peak. Average growth in the US has been 1.1pc over the past three quarters as it grapples with the most drastic fiscal tightening since demobilisation after the Korean War. The Economic Cycle Research Institute continues to insist that the US is in recession right now, a claim less absurd than it sounds.
Russia and Brazil have ground to a near halt. China is in its second “mini-recession” in two years, its growth rate near zero on a GDP deflator basis. China’s oil imports were down 1.4pc in June from a year earlier. Imports of iron ore were down 9.1pc.
It all adds up to a prostrate global economy, yet on Wednesday Brent crude oil was still trading at $106, and US crude at $103. There is no comparison with the collapse to $11 in 1998. The CRB commodities index is still three times higher than a decade ago. You might conclude that the supercycle is in rude good health given what has been thrown at it.
A new Eos report by the American Geophysical Union, “Peak Oil and Energy Independence: Myth and Reality”, argues that global crude output has been stuck on a plateau of around 75m barrels per day (bpd) since 2005 despite enticing returns. “Global net oil exports from oil-exporting countries have peaked and are in decline.”
The output of the big five oil majors – Exxon, BP, Total, Chevron and Shell – has fallen by 26pc over the past nine years, despite a relentless hunt for new fields. The North Sea, the Gulf of Mexico and Alaska are all wasting away. Expenses keep ratcheting up as fields move further out to sea in the Atlantic, drilling deeper through layers of salt. Theoretical reserves are meaningless. What matters is the break-even cost.
Eos said flows from the world’s existing fields are falling at 5pc a year, and it is questionable whether shale or tar sands can easily step into the breach. “Production from these unconventional sources is difficult and expensive, and has a very low energy return on investment. Simply stated, it takes energy to get energy,” it said.
Using a rule of thumb that 4pc global growth requires a rise in oil supply of 3pc, Eos concluded that the world will need another 17m bpd within five years unless we find a way to change our habits fast.
To the consternation of the authors, the report was cited by the BBC this week as evidence that peak oil production is a myth. “Where they got that idea escapes us,” said co-writer Jim Hansen.
What is clearly true is that US fracking has transformed America’s economic and strategic prospects, slashing gas costs for industry to one third of European and Asian levels, and reviving the US chemical, glass and steel industries in what we now call the US manufacturing renaissance.
Good for them. It is testimony to US engineering quality and the irrepressible spirit of the Great Republic. The sooner we can follow suit in this benighted isle, the better. One shudders at the reflexive Nimbyism of our complacent middle classes. Do they know how delicate our national predicament has become as we live chronically beyond our means, with the worst trade deficit in a quarter century, the worst budget deficit in the Atlantic world and an illusory recovery driven by debt-fuelled spending yet again? I doubt it.
But though fracking is a Godsend, let us not lose our heads. The US Energy Department expects shale oil to add 3.1m bpd to America’s oil output by 2020, a remarkable feat but far less than the 5.4m estimates of a much-cited study by Leonardo Maugeri at Harvard.
The depletion rate on rigs at the Bakken field in North Dakota – the biggest US shale field – is precipitous. Output falls 30pc within two years, and a third is leaking into the air. Shale bears say average declines are nearer 70pc in the first year, and dismiss the whole craze as a bubble.
That is going too far. The technology is improving every week. The decline rate may flatten over time. Yet claims of a 100-year bonanza in the US are wishful thinking. “The upper limit of supply is likely closer to 23 years using present day rates of consumption,” said the Eos report.
Kevin Norrish from Barclays said US drillers have already tapped the “best plays” for shale, with newer Utica ventures in the north east of the US and Canada coming up short. The biggest productivity leaps may already have happened. “We expect a steep slowdown in the rate of tight oil production growth from the middle of this decade onward,” he said.
Barclays is defiantly holding to a Brent crude forecast of $184 in 2020, betting that spare capacity in global output will prove thinner than supposed, and that oil shocks will come back to haunt us.
We should think of shale as one-generation play for the US, enough to ensure American superpower primacy into the middle of the century. Whether the rest of the world can follow suit in any meaningful time-frame is an open question. Boston Consulting Group said there were 110,000 shale wells in the US and Canada by the end of last year, and just 200 in all other countries combined.
Argentina, Poland and Ukraine may try to get going after 2015 but they have almost no service infrastructure, and all score badly on “ease of doing business”. Australia may do better from 2017 onwards.
China has the world’s biggest reserves on paper. It is itching to start but much of its shale is in the north-west desert where there is no water, and frackers have yet to find a viable extraction process without water. Not one of the 19 drilling awards issued by the Communist authorities in January went to companies with oil and gas experience. They were mostly power utilities or coal miners.
Even if China seizes the prize, it will first have to build a vast network of pipelines. That will take a great deal of energy, long before shale supply reaches the market.
As for Western Europe, it has mostly shunned shale out of obscurantist ideology, depriving itself of a way out of its EMU quagmire. Common sense will prevail in the end, but Europe does not have the luxury of time. The next five years may decide whether Carolingian Europe spirals into catastrophic decline as the ageing crisis hits, or whether it can hang on for another half century. It may already be too late.
We all love a fresh narrative but consensus has swung too fast from the 2008 oil panic to the energy complacency of 2013, and done so on slender evidence. As matters stand, peak cheap oil remains an incontrovertible fact. To Oil Drum, a fond farewell.
16 Comments on "Commodity supercycle in rude health despite shale"
LT on Wed, 31st Jul 2013 11:58 pm
Living costs: rents, housing, cars, foods, college tuition, fuels, health cares are DESIGNED to rise faster than wages, generally speaking. That’s because we are born to work, not to live, to pay interests ! 🙂
BillT on Wed, 31st Jul 2013 11:59 pm
Another ad for big oil and fraking, nothing more. No real ‘facts’ here.
Arthur on Thu, 1st Aug 2013 3:23 am
“The eurozone is in the longest unbroken recession since the 1930s, with industrial production 13pc below the pre-Lehman peak.”
If you look at the list of the world’s largest harbour, nine are Asian, number four is Rotterdam in Holland, which services the entire European hinterland via the Rhine river. If you care to look at the number of million tons of goods that were handled:
http://nl.wikipedia.org/wiki/Haven_van_Rotterdam
2012: 442 million ton
(Scroll down a bit) you that there was only one year of strong negative growth, namely in 2009 after the Lehmann crash and that since then, figures bounced back strongly again, even in absolute numbers. These figures are indicative for the European economy as a whole. So I am not buying these ‘depression’ BS stories. Trade is at an alltime high.
BillT on Thu, 1st Aug 2013 3:48 am
Those could be tons of dirt, Arthur, not I-pads. The EU is in a recession, if not a depression as is the US. You do not have double digit unemployment in a growing economy. ALL government produced numbers are lies and coverups. The EU imports more than it exports. A negative in any country.
The US Federal Reserve is keeping EU banks solvent to the tune of trillions of dollars pumped into the system through US branches of EU banks. More than is going into the US banks.
No, The EU is definitely in a recession/depression, and like the US, will not come back out this side of collapse. I see the breakup of the EU before 2020, and the Euro long before that. The race is on between Japan, the EU and the US as to who pushes over the first domino.
Arthur on Thu, 1st Aug 2013 4:04 am
http://rt.com/business/eurozone-unemployment-june2013-fall-838/
You are making that Rotterdam dirt story up as you go in order to keep your catastrophic black outlook on life support. Germany does not know where to get qualified workers for it’s booming economy.
Arthur on Thu, 1st Aug 2013 4:24 am
More ‘collapse’ news: Japan growing 3.5%
http://www.themeshreport.com/2013/05/japanese-economy-grew-at-3-5-percent-pace-in-1q/?utm_source=taboola
Mike on Thu, 1st Aug 2013 8:53 am
Arthur, it’s almost like you have never heard of channel stuffing? or quantitative easing? Your print 65 billion dollars a month and give it to investment banks to invest in the stock market and yes you are going to get “growth” every child with an ounce of intelligence can tell you that.
The rest of us look at things like unemployment, wage rise caps, the collapsing infrastructure, the rioting, the increasing energy prices, the collapsing health care situation, the horse meat scandal, the fact that everything you buy now lasts about 12 months before disintegrating… etc etc etc.
But anyway you keep believing in your civil religion of progress, I don’t even know why you bother coming to this website when your world view is so well catered for by the MSM. The only thing I can think is you are a failed doomer, you’re someone that wanted the world to collapse very quickly and you waited and waited and it didn’t. Doomers quite often see the light when their prophecies don’t come to pass, the rest of us know it is going to be a long slow painful chug down to the bottom that will probably only be partly completed by the time I am pushing up daisies.
Arthur on Thu, 1st Aug 2013 9:31 am
“Arthur, it’s almost like you have never heard of channel stuffing? or quantitative easing? Your print 65 billion dollars a month and give it to investment banks to invest in the stock market and yes you are going to get “growth” every child with an ounce of intelligence can tell you that.”
Mike, I was talking about Europe. We do not have QE, we have austerity. You should have that as well. For the moment you can afford QE, because of the reserve currency status of the dollar. But you run the risk that trade partners will flee from the dollar, in fact they already do to some extent. In Europe we have no global empire, no 800 foreign basis, no 12 carriers, no 45 million on foodstamps, no defense spending equal to that of the rest of the world combined. The EU has more or less it’s house in equilibrium and we are not going to be a third world country by 2024. And we have a credible renewable energy strategy in place. And we have lo Lobby lording over us.
Mike on Thu, 1st Aug 2013 10:10 am
US investors do invest in European and Asian stock as well you know, or were you unaware of this? 65 billion goes a long way around the world.
What makes you think I am from the US? I am from the UK actually. I can’t believe you are honestly spouting such total and utter nonsense. The EU has its house in equilibrium? I presuming you have all your money in the markets then? And my friend by 2024 we’ll all be living in a neo feudal system of some kind or other. Your renewables will be for the 1% (the lords)who can afford it for a while before it breaks down and can’t be used anymore.
Renewables are crap, the market has spoken on that one. did you ever get back to me on that error on your German wind power data? You said that Germany met something like 60% of it’s power needs on one perfect optimum day from renewables, you then said it was a Wednesday when the economy was in full swing. Well it actually turned out to be a Sunday afternoon (when everyone is asleep or having a walk)so I don’t really trust your data gathering skillz
Arthur on Thu, 1st Aug 2013 10:12 am
“But anyway you keep believing in your civil religion of progress”
I do not believe in a ‘religion of progress’
“The only thing I can think is you are a failed doomer”
I reluctantly accept that qualifition, I am indeed no (longer a) doomer. There are too many geopolitical and cultural advantages tied to the demise of the oil age, endless economic growth and old style industrial civilization. I could not care less if Joe Average will be driving a car by 2025 or not. I hope he does not.
But the point is: I am not going to call a situation a depression if it isn’t a depression. Greece, yes, but Greece is 1% EU GDP and does not count. Spain? Hmm, always had high unemployment. The rest is not too bad. The general sense of despair in the US is not present in the EU. The US elite has embraced the idea of ‘global hegemony’ and the US population reluctantly follows. But 180 million aging Euro-Americans are simply not going to rule the world in the long term, let alone a zionised elite of a few million. But the US elite is not yet willing to abdicate from it’s globalist ambitions. So something has to give. And since nobody is willing to militarily challenge the US, the focus will be directed towards the dollar with attempts to avoid using it. And it cold very well be that a Muslim Brotherhood uprising in Saudi-Arabia will initiate the downfall of the dollar. The position of the dollar is first and foremost tied to the agreement between Washington and the ‘House of Saud’ to only accept dollars for oil. A MB takeover would open SA to accept other currencies as well, as long as that currency is backed by a diverse economy that can deliver goods SA needs (EU, China, Japan, Russia). The MB is a grass roots organisation; US power in the ME rests on support of the Egyptian military as well as the ‘House of Saud’. Qatar seemed to be willing to jump on the MB bandwagon, until Washington decided to a policy change and leave Assad where he is, after all. But this merely underlines the weakness of the US strategic position in the ME: one Arab Spring uprising in Riyahd or in the eastern Shi’ite oil provinces and the dollar is history.
Arthur on Thu, 1st Aug 2013 10:23 am
“You said that Germany met something like 60% of it’s power needs on one perfect optimum day from renewables, you then said it was a Wednesday when the economy was in full swing.”
I do admit that I overlooked that it was on a sunday, not that I said it was on a wednesday:
http://www.solarserver.com/solar-magazine/solar-news/current/2013/kw25/solar-pv-wind-reach-60-of-mid-day-german-electricity-output-on-june-16th.html
Btw: Saturday June 15 it was also 59%.
Arthur on Thu, 1st Aug 2013 10:26 am
Here is a more realistic measure:
http://deepresource.wordpress.com/2012/08/18/germany-2012-h1-26-electricity-from-renewables/
During the first half of 2012 Germany had 26% electricity from renewables. And this is only 2012. So this includes every day, not just perfect weekend days like 15-16 June 2013. Not too far in the future this will be 50%.
Mike on Thu, 1st Aug 2013 1:30 pm
Your last post makes it clear you do believe in “progress” When it reaches 50% (for the year) and all that power isn’t backed up by coal or gas, then you can get back to me and we’ll have a discussion. As it is all of these renewables are hugely subsidised by fossil fuels, and the belief that a tech that has such a low EROEI can possibly hope to sustain itself whilst keeping everything bouncing along merrily in the economy is dreamland thinking. will it be mad max? no, will it be the dark ages V2? yes
BillT on Thu, 1st Aug 2013 2:43 pm
Mike, Arthur’s blinders are welded in place and they are getting more and more narrow as time goes on. He doesn’t want to consider that he might be wrong.
Arthur on Thu, 1st Aug 2013 3:14 pm
“will it be the dark ages V2? yes”
Indeed for all those doomers who refuse to prepare for a new future and keep setting themselves checkmate by convincing themselves that you need fossil to create a new turbine or panel.
You don’t.
Ert on Thu, 1st Aug 2013 4:01 pm
@Arthur
The “don’t” get enough qualified worker story is not right. Don’t get enough “cheap” qualified worker is correct.
The median inflation-adjusted income in Germany is flat since approx. 18 years. Germany “works” since it’s underbids all its European competitors and has established a low wage market with Schroeders “Agenda 2010”.
If you count the official unemployed workers like the U-6 Number in the states we have unemployment in the 15% range. And even that is based on the official numbers from the government.
Current Germany profits from the Euro and the downfall of its neighbours – but that business model is not sustainable indefinitely.