Natural Gas

China: Is peak coal part of its problem?

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Published on the Our Finite World on June 20, 2016A coal train once supplied the city of Holland, Michigan with fuel for its electric generating plant. They converted the plant to natural gas. Their costs are down, their emissions are down, and coal is down for the count. (Photo by wsilver/Flickr)A coal train once supplied the city of Holland, Michigan with fuel for its electric generating plant. They converted the plant to natural gas. Their costs are down, their emissions are down, and coal is down for the count. (Photo by wsilver/Flickr)

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The world’s coal resources are clearly huge. How could China, or the world in total, reach peak coal in a timeframe that makes a difference?

If we look at China’s coal production and consumption in BP’s 2016 Statistical Review of World Energy (SRWE), this is what we see:

Figure 1. China's production and consumption of coal based on BP 2016 SRWE.

 

 

 

Figure 1. China’s production and consumption of coal based on BP 2016 SRWE.

Figure 2 shows that the quantities of other fuels are increasing in a pattern similar to past patterns. None of them is large enough to make a real difference in offsetting the loss of coal consumption. Renewables (really “other renewables”) include wind, solar, geothermal, and wood burned to produce electricity. This category is still tiny in comparison to coal.

Figure 2. China's energy consumption by fuel, based on BP 2016 SRWE.

 

 

 

Figure 2. China’s energy consumption by fuel, based on BP 2016 SRWE.

Why would a country selectively decide to slow down the growth of the fuel that has made its current “boom” possible? Coal is generally cheaper than other fuels. The fact that China has a lot of low-cost coal, and can use it together with its cheap labor, has allowed China to manufacture goods very inexpensively, and thus be very competitive in world markets.

In my view, China really had no choice regarding the cutback in coal production–market forces were pushing for less production of goods, and this was playing out as lower commodity prices of many types, including coal, oil, and natural gas, plus many types of metals.

China is mostly self-sufficient in coal production, but it is a major importer of natural gas and oil. Lower oil and natural gas prices made imported fuels of these types more affordable, and thus encouraged more importing of these products. At the same time, lower coal prices made many of China’s mines unprofitable, leading to a need to cut back on production. Thus we see the rather bizarre result: consumption of the cheapest energy product (coal) is falling first. We will discuss this issue more later.

China’s Overall Historical Production of Energy Products

With the pattern of energy consumption shown in Figure 2, growth in China’s total fuel consumption has slowed, as shown in Figure 3.

Figure 3. China energy consumption by fuel, based on BP 2016 SRWE.

 

 

 

Figure 3. China energy consumption by fuel, based on BP 2016 SRWE.

The indicated increases in total fuel consumption in Figure 3 are as follows: 8.1% in 2011; 4.0% in 2012; 3.9% in 2013; 2.3% in 2014; 1.5% in 2015.

Unless there is a huge shift to a service economy, we would expect China’s GDP to decrease rather rapidly as well, perhaps staying 1% or 2% higher than the growth in fuel consumption. Such a relationship would suggest that China’s reported GDP for 2014 and 2015 may be overstated.

The Problem of Low Coal Prices

Most of us don’t pay attention to coal prices around the world, but according to BP data, coal prices have been following a similar pattern to those of oil and natural gas.

Figure 4. Coal prices since 1999 based on BP 2016 SRWE data.

 

 

 

Figure 4. Coal prices since 1999 based on BP 2016 SRWE data.

Oil prices tend to cluster more closely than those of coal and natural gas because there is more of a world market for oil than for the other fuels. Coal and natural gas have relatively high delivery costs, making it more expensive to trade these products internationally.

Figure 5. World oil prices since 1999 for various oil types, based on BP 2016 SRWE. (Prices not adjusted for inflation.)

 

 

 

Figure 5. World oil prices since 1999 for various oil types, based on BP 2016 SRWE. (Prices not adjusted for inflation.)

Figure 6. Historical prices for several types of natural gas, from BP 2016 SRWE.

 

 

 

Figure 6. Historical prices for several types of natural gas, from BP 2016 SRWE.

The one place where natural gas prices failed to follow the same pattern as oil and coal prices was in the United States. After 2008, shale producers extracted more natural gas for the US market than it could easily absorb. This overproduction, together with a lack of export capacity, led to falling US prices. By 2014 and 2015, prices were falling everywhere for oil, coal and natural gas.

Why Prices of Fossil Fuels Move Together

The reason why prices of fossil fuels tend to move together is because commodity prices reflect “demand” at a given time. This demand is determined by a combination of wage levels and debt levels. When wage levels are high and debt levels are increasing, consumers can afford more goods, such as new homes and new cars. Building these new homes and cars takes many different kinds of materials, so commodity prices of many kinds tend to rise together, to encourage production of these diverse materials.

Why Fossil Fuel Prices Don’t Necessarily Rise Indefinitely

Rising fossil fuel prices depend on rising demand. Wages are not really rising fast enough to increase fossil fuel prices to the levels shown in Figures 4, 5, and 6, so the world has had to depend on rising debt levels to fill the gap. Unfortunately, there are diminishing returns to adding debt. We can witness the poor impact that Japan’s rising debt level has had on raising its GDP.

Adding more debt is like using an elastic rubber band to increase the world output of goods and services. Adding debt works for a while, as the relatively elastic economy responds to growing debt. At some point, however, the amount of debt required becomes too high relative to the benefit obtained. The system tends to “snap back,” and prices fall for many commodities at the same time. This seems to be what happened recently in late 2008, and what has happened again recently. The challenge is to restore world economic growth, since it is really robust world economic growth that allows commodity prices to rise to high levels.

Some Historical Perspective on Rising Energy Prices and Rising Debt 

In “normal” times, a small increase in demand will increase production of fossil fuels by several percentage points–generally enough to handle the rising demand. Prices can then fall back again and there is no long-term rise in prices. This situation occurred for quite a long time prior to about 1970.

After about 1970, we found that it became more difficult to raise production levels of energy products, without permanently raising prices. US oil production began to decline in 1970. This started an energy crisis that has been simmering beneath the surface for 45 years. Various workarounds for our energy shortage problem were tried, such as adding nuclear, drilling for oil in new areas such as the North Sea, and building more energy efficient cars. Another approach used was reducing interest rates, to make high-priced homes, cars and factories more affordable.

By the late 1990s, even these workarounds were no longer providing the benefit needed. Another idea was tried: encourage more international trade. This would allow the world access to untapped energy sources, including coal, in the less developed parts of the world, such as China and India.

This too, worked for a while, but resource depletion tended to continue to raise the cost of energy extraction. Also, the competition with low-cost labor in India, China, and other countries tended to hold down the wages of the less-educated workers in the developed countries. Higher prices at the same time that wages for some of the workers were depressed is, of course, a bad mismatch.

One way of “fixing” the problem was with cheaper debt, and more debt, so that consumers could buy homes and cars with lower incomes.  This fix of more debt stopped working in 2008, as repayment on “subprime” debt faltered, and all fossil fuel prices collapsed.

Figure 7. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

 

 

 

Figure 7. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

To “re-inflate” the world economy, world leaders began to try to add even more debt. They did this by fixing interest rates even lower, starting in late 2008, using a program called Quantitative Easing (QE). This program was successful in raising commodity prices again, although its effect seemed to diminish with time. China’s huge growth in debt during this period helped as well.

Energy prices turned downward again in mid-2014, when the United States discontinued its QE program, and China (under new leadership), decided not to continue increasing debt as quickly as before. The result was a second sharp drop in commodity prices, without a corresponding drop in the cost of producing these fossil fuels. This shift was devastating from the point of view of energy supply producers.

Impact of Lower Prices on China’s Coal Producers

China has a lot of coal resources, but not all of these resources can be produced cheaply. Generally, the least expensive resources tend to be produced first. When prices are high, it may look like deeper, thinner seams can be extracted, in addition to the easier and cheaper to extract seams, but this is never certain. At some point, prices may fall and thus issue a “stop mining” instruction.

When coal prices drop, producers are likely to encounter debt problems, as loans related to coal operations become due. The reason why this happens is because loans taken out when coal prices were high are likely to reflect an optimistic view of how much can be extracted. Once prices drop, operators discover that they have committed themselves to paying back more in loans than their coal mines can actually produce. This seems to be happening now.

What Are the Implications for Future World Coal Production?

If we look at a chart showing world consumption of energy products by fuel, we see that world coal production has turned down in a similar manner to the downturn in Chinese coal production.

Figure 8. World energy consumption by fuel, separately by major groupings.

 

 

 

Figure 8. World energy consumption by fuel, separately by major groupings.

There are many large areas of the world that seem to be beyond their peak in coal production, including the United States, the Eurozone, the Former Soviet Union, and Canada. Note that the United States’ coal production “peaked” in 1998. This added to pressures for globalization.

Figure 9. Areas where coal production has peaked, based on BP 2016 SRWE.

 

 

 

Figure 9. Areas where coal production has peaked, based on BP 2016 SRWE. FSU means “Former Soviet Union.”

If we consider the rest of the world excluding the areas shown separately in Figure 9 as the “Non-Peaking Portion of the World,” we find that China’s current coal production far exceeds that of the Non-Peaking portion of world production.

Figure 9. Coal production in China compared to world production minus production shown in Figure 8.

 

 

 

Figure 10. Coal production in China compared to world production minus production shown in Figure 8.

Figure 10 indicates that even the non-peaking portion of the world is showing a downturn in production in 2015, no doubt relating to current low prices.

Another issue is that India’s coal production now falls far short of its consumption. Thus, India is becoming a major coal importer. In 2015, India’s consumption of coal slightly exceeded that of the United States, making it the second largest consumer of coal after China, and the largest coal importer. If China should decide to increase its coal consumption by adding imports, it would need to compete with India for supplies.

Figure 14. India's production and consumption of coal, based on BP 2016 SRWE.

 

 

 

Figure 11. India’s production and consumption of coal, based on BP 2016 SRWE.

India’s hope for continued economic growth is also tied to coal, even though it doesn’t produce enough itself. India’s use of natural gas is declining, because its own locally-produced natural gas supplies are declining, and imports are expensive.

Figure 11. India's energy consumption by fuel based on BP 2016 SRWE.

 

 

 

Figure 12. India’s energy consumption by fuel based on BP 2016 SRWE.

Imported coal is more expensive than locally produced coal, because of the transportation costs involved. Thus, adding an increasing portion of imported coal will eventually make India’s products less price competitive. India started from a lower wage level than China, so perhaps it can temporarily withstand a somewhat higher average coal price. At some point, however, it will reach limits on how much of its mix can be imported, before workers cannot afford its products made with this high-priced coal.

As noted above, India and China will be competing for the same exports, if they both expect to grow using imported coal. We can modify Figure 9 to show what the size pool producing imports might now look like, if the countries needing imports is “China + India,” and the part with perhaps extra coal to export is the Non-Peaking Areas from Figure 9, less India.

Figure 12. Coal production for China plus India, compared to production from non-peaking group used in Figure 9, minus India. Based on BP 2016 SRWE.

 

 

 

Figure 12. Coal production for China plus India, compared to production from non-peaking group used in Figure 9, minus India. Based on BP 2016 SRWE.

This comparison shows an even a worse mismatch between the peaking areas, and the current production of areas that might raise their supply.

Is Future Coal Production a Function of Resources Available, or of Prices?

Future coal production is clearly a function of both the amount of resources available and future prices. If there are no resources available, it is pretty clear that no resources can be extracted.

What most researchers have not understood is that future prices are important as well. We can’t expect that prices will rise indefinitely, because low-paid workers, especially, find themselves in a squeeze. They find homes and cars increasingly unaffordable, unless the government can somehow manipulate interest rates down to never heard of levels. Because of this lack of understanding of the role of prices, most of today’s models don’t consider the possibility that price levels may cut back production, at what seems to be an early date relative to the amount of resources in the ground.

Part of the confusion comes from the view economists have regarding prices, innovation, and substitution. Economists seem to be firmly convinced that prices will always rise to fix the problem of future shortages, but their models do not seem to take into account the major role that energy plays in the economy, and the lack of available substitutes. Certainly, the history of energy prices does not support this claim.

If I am correct in saying that prices cannot rise indefinitely, then all three of the fossil fuels are likely to peak, more or less simultaneously, when prices can no longer stay high enough to enable extraction. The downslope after the peak will be based on financial outcomes, such as the bankruptcies of coal operators, not on the exhaustion of reserves or resources in the ground. This dynamic can be expected to produce a much sharper downturn than modeled by the Hubbert Curve.

If analysts consider the possibility that prices will never again rise very high for very long, they realize such a low-price scenario would be a catastrophe. That is why we hear very little about this possibility.

Conclusion

It appears likely that China’s coal production has “peaked” and has begun to decline. This is especially likely if energy prices stay low, or never rise very high for very long.

If I am correct about energy prices not rising high enough in the future, all fossil fuels may reach peak production more or less simultaneously in the not too distant future. Widespread debt defaults seem likely if this happens.

If we are, in fact, reaching peak coal, even before peak oil, this is disconcerting for those who believe that the Hubbert Model is the only way of viewing the world. Maybe we are expecting too much from the model; maybe we need a model that considers prices, and how prices depend on wages and rising debt. Falling energy prices are especially bad for the system; they seem to lead to debt defaults.

Unconventional Gas Field Development & Optimism Bias

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Published on FEASTA on March 29, 2016

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Unconventional gas field development and optimism bias: submission by Brian Davey to the UK Environment Agency

Brian Davey recently made a submission on fracking to the UK Environment Agency, in response to the UK-based company IGas’s application to drill two wells in North Nottinghamshire as part of its shale gas exploration efforts. You can access the documents which Brian is responding to here.

In his submission, Brian stresses that there is a need for both anticipatory and retrospective experience-based risk assessments, and also argues that there are specific risks in this case that need to be addressed. In conclusion, he writes, “there are now over 550+ peer reviewed academic studies relating unconventional gas field development to public health and the environment – there is an ethical and scientific obligation to connect risk assessment and risk management in order to make it consistent with the findings of this literature.”

Read the submission

 

 

Shale Euphoria

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Published on FEASTA on March 23, 2016

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The Boom and Bust of Sub Prime Oil and Natural Gas

Those whom the gods wish to destroy they first send mad

Introduction

The aim of this article is to show that the shale industry, whether extracting oil or gas, has never been financially sustainable. All around the world it has consistently disappointed profit expectations. Even though it has produced considerable quantities of oil and gas, and enough to influence oil and gas prices, the industry has mostly been unprofitable and has only been able to continue by running up more and more debt. How could this be? It seems paradoxical and defies ordinary economic logic. The answer is to be found in the way that the shale gas sector has been funded. It is part of a bubble economy inflated by monetary policy that has kept down interest rates. This has made investors “hunt for yield”. These investors believed that they had found a paying investment in shale companies – but they were really proving that they were susceptible to wishful thinking, vulnerable to hype and highly unethical practices that enabled Wall Street and other bankers to do very nicely. Those who invested in fracking are going to lose a lot of money.

A Global Picture of disappointed expectations

Around the world big expectations for fracking have not been realised. One example is Argentina where shale oil reserves were thought to rival those in the USA. It is a country where there has been local opposition while central government pushed the industry in alliance with multinational companies and its own company YPC. However profitability has been elusive. To have any hope of profitability shale development has to be done at scale to rapidly bring down costs enough to make a profit. That requires a lot of capital and companies will not make this capital available without being sure that they are going to make a lot of money – but they cannot be sure until they have done tests for up to two years.

“It’s a sort of chicken and egg dilemma. Without profits, the estimated $20 billion a year needed to develop the play won’t come. And without this investment in drilling tens of thousands of wells, the economies of scale won’t be reached on the fields to cut costs.

“A reason not to rush into production — only 400 wells have been drilled — is that wells must be tested for up to two years to gauge the potential of the shale rock before a company will commit billions of dollars. This is especially the case now that low global oil prices have slimmed investment budgets for frontier plays.” (Charles Newbury, “Struggles to cut cost delay oil production in Argentina” Platts Oilgram News. August 17th 2015 at http://blogs.platts.com/2015/08/17/cut-cost-delay-oil-play-argentina/ )

The situation in Argentina highlights the underlying problem for the economics of shale oil and shale gas. Unconventional oil and gas fields have much higher costs than conventional ones. Tapping “conventional” oil and gas from permeable geological strata is cheaper in that the oil and gas flows underground and can be pumped out with less engineering. In contrast an “unconventional gas field” has to release the gas from impermable rock and therefore needs up to 100 more wells for the same amount of gas (or oil). A field must achieve economies of scale to have any chance of making a profit. It needs more activity underground to fracture the rock and it needs more activity on the surface to facilitate that. That is why it is more dangerous to the environment and public health – and also why it is more financially expensive. It requires more ongoing capital equipment too. Without a high gas (or oil ) price all of these activities cannot be made profitable.

Looked at in this way “unconventional oil and gas” is not the magical answer for peak oil (or later for peak natural gas) that it might have once seemed to be. To be long term viable the fracking sector requires three things: favourable geology, high oil and gas prices and easy and cheap credit. All three have proven elusive, making for disappointing results in all of the locations around the world where it has been tried. Unconventional gas is struggling to get off the ground outside of the USA and Australia. And in the USA, where it started, although it managed to get the credit to pay for the capital expenditure there are now grave doubts that a mountain of credit will ever be paid pack.

But let’s look outside of the USA too. Take Europe for example. In 2011 the international oil and gas industry and the Polish government thought Poland was going to be a major source of shale gas. 75 exploratory wells were drilled up to 2015 and 25 were fracked. The amount of gas recovered was one tenth to one third of what was needed for the wells to be commercially viable. Besides retreating from Poland, the industry has pulled out of nascent shale drilling efforts in Romania, Lithuania and Denmark, usually citing disappointing yields.

In the UK and Ireland too fracking is still stuck at the pre-exploratory stage, largely because of the rapid and powerful development of a movement of opposition. Although not definitive, a moratorium in Scotland and a “presumption against” fracking by planners in Northern Ireland, are political set backs for the industry. Yet even if the public and political opposition was not there, there would be reasons to doubt that fracking is viable in the UK. The doubt starts with the geology. While the British Geological Survey has produced maps of shale layers, and while it has been suggested that the carbon content might be there, the data is lacking for other key parameters, for example for rock porosity. In addition the shale in the UK has more folds and faults when compared to US fields. This might to lead to more earthquakes which would damage the wells – plus leading to a potential failure to achieve the pressure needed for fracturing if fracking fluid leaks into small faults when pushed underground.

Oil and Gas Prices

Now there are further doubts because of low and falling oil and gas prices. Here the issues are a little different for oil compared to natural gas on the one hand and for the situation in the USA as compared to other producing zones in the world on the other. That said, what all exploration and production companies are facing, whether in oil or gas production or whether in the USA or elsewhere, is that prices that are too low. It is proving difficult or impossible for most producers to make a profit given the costs of extracting and distribution. That has been especially noticeable for shale gas. Let us however first look at oil prices.

During the crash of 2007-2008 global oil prices crashed from a high peak but then recovered again. Between November 2010 and September 2014 there were 47 months in which oil prices were over $90 a barrel. This period of high oil prices can be described as being broadly reflective of supply and demand. On the demand side the global economy recovered, to a large degree stimulated by a massive credit-fuelled residential and infrastructure boom in China. This pumped up demand. On the supply side production from Libya and Iran was kept out of the world market because of the turmoil in Libya and sanctions against Iran. Thus, while there was some production increase from Saudi Arabia and, eventually, even more from Iraq, these increases were largely cancelled by Iran and Libya. Demand exceeded supply and prices remained high but the situation began to change in the autumn of 2014.

On the demand side the Chinese economy stalled while on the supply side production increased. OPEC as a whole was not the main source of that increasing production, and nor was Russia – the main source of increasing oil production was the boom in US shale oil. For reasons to be explored, production from the USA continued to soar even though prices fell and after a price rally early in 2015 prices continued to fall into 2016.

A similar downward trend has occurred around the world in natural gas prices – though in the USA they have been lower far longer – and certainly too low to allow for profitability.

In regard to gas the issues are somewhat different from oil because the market for natural gas is less globally networked. Natural gas markets are based on global regions and different gas prices in different parts of the world. Thus there is a north american gas market, a european gas market and a market in the far east. There are multiple long distance gas pipelines that are important economically and geopolitically. Wars and rivalries are fought over pipeline routes – this is a component in the Syrian conflict. However natural gas could not be transported so easily between continents – until recently, because now there is an infrastructure for sea transported liquified natural gas under development (LNG). Sea transported LNG begins to change things because it makes the market for natural gas more globally competitive.

At a risk of simplifying a varied picture natural gas prices in various areas have been stable at a low level or drifting downwards over the last two years and insufficient for profitability in a gas fracking sector. In both the USA and Europe natural gas prices are a half of what they were in 2014. In the USA this has been because of overproduction of gas, conventional and unconventional, with conventional production declining and being replaced and overtaken by unconventional production – as of late in 2015 however shale gas production too began to fall. For years production has been unprofitable in all but the best areas and in decline. Now it is in decline generally.

In Europe production decline because of depleting conventional gas fields has not prevented a fall in the gas price because demand has been falling too and this is likely to remain the case. Thus a recent report published by the Natural Gas Programme of the Oxford Institute for Energy Studies, concludes that European gas demand will not recover its 2010 level until about 2025. The decline in demand has been due to warmer winters but also due to low demand because of the low growth in manufacturing which has shifted to Asia, because of low population growth and because of energy saving measures too. At the time of writing it is being suggested that the competitive threat from the development of an LNG infrastructure will encourage Gazprom to change its pricing strategy to try to fight off future competition from sea transported supplies. In summary, it is highly likely that the gas price in Europe will remain low for a long time. If so, this completely undermines any remaining case for fracking for natural gas in europe, and particularly Britain.

At current gas prices all the exploration and production companies active in the UK and Ireland would struggle to make a profit. There are 4 studies of extraction costs of natural gas by fracking in the UK – by Ernst and Young, Bloomberg, Oxford Institute of Energy Studies and Centrica. All have maximum and minimum extraction costs. Current gas prices per therm are less than the minimum extraction cost in the lowest study. So for the industry to continue at all it has to assume that gas prices will rise in the future.

shale costs

Low Gas price vs high extraction costs: Zachery Davis Boren, Greenpeace Energy Desk; August 2015 http://energydesk.greenpeace.org/2015/08/20/super-low-gas-price-spells-trouble-for-fracking-in-the-uk/

So what is the future for oil and gas prices? Of course the future is inherently uncertain – a President Trump might provoke any number of wars making America great again – it is difficult to see how Muslims could be banned from entry into the USA without that affecting oil and gas imports from Muslim countries. Or again heightened conflict between Iran and Saudi Arabia might escalate with massive consequences, and not just for the oil and gas price. In these and other conceivable situations, the more chaos the less companies will want to invest anyway. Whether prices are high, or low, if there is too much turmoil conditions will not favour new investment. But leaving aside extreme geo-political scenarios will prices go up or will they go down? If oil and gas prices rise will this be sufficiently and for long enough for unconventional gas to be developed sustainably in the narrow financial or business sense?

The rising price scenario

It is important to grasp the idea that a rising prices scenario is only credible in conditions where a proportion of the industry has been driven out of the business – which is the hope of the Saudi oil industry. What the Saudis would like to see is not only the US fracking companies driven to bankruptcy but the banks that fund them with badly burned fingers and unwilling to finance the industry any more. That said the Saudis too have limited pockets. Their current aggressive foreign policy has to be funded from somewhere and it is conceivable that they could lose the capacity to push the anti-shale agenda through to the bitter end.

If the oil price does bounce back the beneficiaries would be the survivors. There is a view then that the current low prices will eventually lead, not only to falling production in the future but to bankruptcies and capital expenditure cut backs both in the conventional and unconventional sectors. It would speed the decline of oil fields like those in the North Sea where investment is now being slashed. With declining supply, inventories will be sold off, the market will move back into balance…. and then further the other way – so that eventually demand again exceeds supply. Higher prices, possibly spiking, will encourage new investment and the fracking companies will surge back at the other side of the crisis.

What must however be assumed for this to happen is that at some point “growth will resume” because, over the last two hundred years, it always has. If growth resumes the demand for energy will revive in order to feed it – making more material production and consumption possible. Some economists argue that one factor encouraging a revival in demand ought to be the low energy prices themselves. Higher energy prices act as a drag on the economy so low energy prices should do the opposite – i.e. stimulate it. In a recent speech the chair of the US Federal Reserve, Janet Yellen, said that falling energy prices had, on average put an extra $1,000 in the pockets of each US citizen. It is assumed that this would encourage extra spending and thus extra income.

The falling or stagnant prices scenario

An alternative view is more sceptical about the revival of the global economy and of demand because of the high level of debt. In an economy where indebtness is low, falling energy prices probably would act as a stimulus for energy consumers. But will there be any or enough stimulus where the debt to income ratio is high? In an indebted economy windfall gains from reduced energy prices are likely to be partly used to pay off debts rather than being spent. A further issue is what will happen because of the way in which the finance sector has made itself vulnerable? It has channelled substantial credit to the energy sector – to exploration and development companies that now have difficulties paying this credit off? It certainly will not help in finding investment money to get fracking off the ground in the UK and elsewhere if it all ends in tears in the USA.

In the pessimistic scenario if the economy does not revive then there can be some scepticism that energy prices will revive too. This is the scenario in which deflationary conditions continue and even deepen. On this view the global economy is entering a long period of stagnation, decline and chaos. Some economists are describing how growth has slowed using descriptive phrases like “secular stagnation”. The fate of the Japanese economy from the early 1990s onwards gives grounds for comparison and concern. After a quarter of a century Japan has not escaped prolonged recessionary conditions. Because the global economy is highly indebted central banks have driven down interest rates to zero and now even below that. This has led to a bubble in asset markets but it has done little to spur generalised economic growth.

There could be a vicious circle here – without demand arising in a sustained growth process pushing up energy prices the profitability of the unconventional sector will never be sufficient to make future investment in that sector pay. In these circumstances future oil and gas production will not rise. Production will fall in the USA, especially as more of the identified sweet spots in the best plays are exhausted. In textbook supply and demand theory falling supply should eventually lead, ceteris paribus, to a rise in prices that justifies more investment and therefore more production. However “ceteris paribus” (other things remaining unchanged) does not apply in a stagnating or a declining economy. A declining economy is not one where private economic actors invest money in the hope of a future return because the necessary confidence and conviction about the future is not there. Purchasing power is hoarded, purchases are deferred where possible, debts are paid off where possible. These actions tend to intensify the deflation. If this is what happens, and it seems likely, it will make the problems of the shale gas sector even worse.

The Fracking Companies and the Finance Sector

Before the current difficulties Wall Street made a fortune in fees arranging debt finance for the US shale sector. Investors who were “looking for yield” instead of the ultra low interest rates payable on government debt thought the way to find that yield was to pile their money into junk finance to fund the frackers. Despite the economic reality Wall Street encouraged the misinvestment. Now the wall of energy sector junk finance repayable in the future is huge. The further forward one goes the higher it is. How much of this debt will ever be repaid? And what will happen to those who lent it if it is not? Given what has already been said the long run ability of the sector to repay its debt seems highly questionable. How did it come to this?

debt wall

Source: http://www.artberman.com/art-berman-shale-plays-have-years-not-decades-of-reserves-february-23-2015/

For several years prior to the crash of 2007-2008 the finance sector in the USA were knowingly giving loans to people with no income, no jobs and no assets. The people who organised this were doing so because they were earning fees on each loan arranged. What did they care about the virtual certainty that the loans would never be paid back? The crash was the inevitable result – the consequence of an ethical catastrophe. The banks had packaged the loans up into mortgage backed securities and sold them on so that someone else other than the originating bank carried the risk. Ratings agencies played their role in this crooked system and got fees rating securities that others called “toxic trash” as AAA. Meanwhile derivates contracts against defaults on these rotten securities were also sold even though it was not possible to pay up when the defaults happened – without being bailed out by the monetary authorities, as happened with AIG.

The Shale Bubble – toxic water, toxic air and toxic finance too

For several years after 2007-2008 shale was the next big money spinner – and the next ethical catastrophe for Wall Street. Just as it was blindingly obvious for years that sub prime would crash, but it was a nice money spinner at the time, so Wall Street has made a lot of money pumping up the shale bubble. All the evidence about health and environment costs have been ignored and the information about them suppressed. The information about the economics was ignored too. Of course, someone has to lose eventually but “while the music has played” there has been plenty of money for all sorts of players – petroleum engineers and geologists, PR companies, corrupt politicians, the companies supplying the pipelines, rigs and fracking gear. They had their snouts in the money trough and in many cases abandoned their ethics and their critical faculties while they were feeding.

Nor were investors looking closely enough at where they were going or at what they were funding. Even before the current price crash, many US fracking companies, just like those in Argentina and Poland, were struggling to make real profits yet vast quantities of money were channelled to them. Honest and astute observers who could see that the shale boom was a Wall Street induced bubble were ignored. One example was a report written by Deborah Rogers in early 2013 in which she drew attention to the difference between the reality and the message put out by the PR machine.

According to Rogers “Industry admits that 80% of shale wells ‘can easily be uneconomic.’ Massive write-downs have recently occurred which call into question the financial viability of shale assets and possibly even shale companies. In one case, assets were written off for more than 50% of the purchase price within a matter of months……publicly traded oil and gas companies have essentially two sets of economics. There is what may be called field economics, which addresses the basic day to day operations of the company and what is actually occurring out in the field with regard to well costs, production history, etc.; the other set is Wall Street or “Street” economics. This entails keeping a company attractive to financial analysts and investors so that the share price moves up and access to the capital markets is assured. “Street” economics has more to do with the frenzy we have seen in shales than does actual well performance in the field. With the help of Wall Street analysts acting as primary proponents for shale gas and oil, the markets were frothed into a frenzy. Boom cycles have the inherent characteristic of optimism. If left unchecked, such optimism can metamorphose into a mania such as we saw several years ago in the lead up to the mortgage crisis. (Deborah Rogers, “Shale and Wall Street” Energy Policy Forum 2013 http://shalebubble.org/wp-content/uploads/2013/02/SWS-report-FINAL.pdf)

Long before the price slide beginning late in 2014 the much hyped boom was not what it seemed. Roger’s article shows many parallels between the crazy and unethical excesses of Wall Street prior to the 2007 crash and what has been happening in the shale boom. As had happened with sub prime mortgages which were bundled up to become part of mortgage backed securities and then sold on – new kinds of financial assets were invented and sold to allow the unwary to invest their money in order as to “get a part of the action” and participate in the shale bonanza too. One bank instrumental in all of this was Barclay’s Capital, working together with a company called Chesapeake Energy. To help Chesapeake the Barclay’s financial wizards invented a structure called a Volumetric Production Payment (VPP). Rogers quotes a finance industry magazine, Risk, from March 2012.

“The main challenges in putting together the Chesapeake VPP deal were getting the structure right and guiding the rating agencies and institutional investors—who did not necessarily have deep familiarity with the energy business—through the complexities of natural gas production.”

The resulting financial assets were highly complex, off balance sheet, and as Barclay’s admitted the rating agencies had to be “guided” so that they could understand the complexities of the deal. (So much for the competence and independence of the resulting “rating”. ).

Production taking precedence over profitability (and over economic rationality)

The result was that current profitability took second place to an industry PR narrative about what was supposedly going to happen in the future as the shale companies grew and grew. Prior to the crash of 2007 bank employees were under pressure and being incentivised by bonuses to make as many loans as possible – even though many loans were unsound. Now the fracking company managers were being incentivised to produce as much product as possible even though they were losing money. The measure of the future dream was production growth rather than what it ought to have been – profitable production growth. The latter depended on whether that production growth was actually covering costs of production and it was not. It should be stressed again that this was happening before the current price slide. For example an analyst Arthur Berman looked at the financial figures for Exploration and Development Companies representing 40% of the US shale industry for 2013 and 2014 and found them to be powerfully in the negative. There was a $14 billion negative cash flow in 2014. (http://www.artberman.com/art-berman-shale-plays-have-years-not-decades-of-reserves-february-23-2015/)

berman

Nevertheless the good news headlines about the production growth kept the share prices rising and the managers were on bonuses to make that production growth happen. Apart from the sceptics and the communities whose environments and health were under attack, the industry, the government, some naïve academics and Wall Street, all played their part in pumping up the dramatic narrative of the resurgent American Oil and Gas Dream. Eventually the USA would rival Saudi Arabia and more…becoming great again no doubt. As a more recent article in the Wall Street Journal explained:

“Markets have been waiting for U.S. energy producers to slash output during a period of depressed crude prices. But these companies have been paying their top executives to keep the oil flowing. Production and reserve growth are big components of the formulas that determine annual bonuses at many U.S. exploration and production companies. That meant energy executives took home tens of millions of dollars in bonuses for drilling in 2014, even though prices had begun to fall sharply in what would be the biggest oil bust in decades. The practice stems from Wall Street’s treatment of such companies’ shares as growth stocks, favoring future prospects over profitability. It has helped drive U.S. energy producers to spend more unearthing oil and gas than they make selling it, energy executives and analysts say.

It has also helped fuel the drilling boom that lifted U.S. oil and natural-gas production 76% and 31%, respectively, from 2009 through 2015, pushing down prices for both commodities. “You want to know why most of the industry outspent cash flow last year trying to grow production?” William Thomas, CEO of EOG Resources, said recently at a Houston conference. “That’s the way they’re paid.” (Ryan Dezember, Nicole Friedman and Erin Aillworth. “Key Formula for Executives Pay: Drill Baby Drill” http://www.wsj.com/articles/key-formula-for-oil-executives-pay-drill-baby-drill-1457721329)

The Euphoric Economy at Work – how to rip off manic investors

All of this raises the question of how, with profitability so low, this reckless show has managed to stay on the road for so long and still continues. A cynical answer would be to say that the function of Wall Street is to connect the greedy and stupid with people and institutions without scruples who will spend their money for them. For this to happen optimism must be generated at all times whether this optimism has any foundation or not. The study of bubbles is all about people who are able to swim in an ethical sewer oblivious to their environment. They are too “euphoric” or high on the prospect of making a lot of money to calmly calculate what is happening. Another word for this is mania. It helps to consider this as a period of collective madness like a mania – a period of collective excitement in which the capacity for ethical and other judgements are impaired.

In this collective insanity one can think of the money making calculations like this – if you buy the right to drill and are able to identify the geologically favourable “sweet spots” then at first the results are likely to be good. Instead of then drilling the less favourable locations and seeing your profits fall away you tell beautiful stories to another company with deep pockets enticed by the good news of the early success. So it is possible to sell the less favourable areas. Or maybe you sell the company, merging it with another. In this Wall Street (or the City of London no doubt) will come to your aid because it makes nice fees from mergers and acquisitions. The new owners then makes the loss. It is the buying company that then has to write down its balance sheet when it subsequently discovers that it was sold a mirage.

The stories about being duped are never told as loudly and plainly as the stories of the wonderful shining future that sell the fraud in the first place. That’s because managers do not like to speak loudly about their incompetence to avoid the embarrassment of admitting they were duped. It is usually possible to deny that it would have been possible for them to know what was happening and, after all, why should these managers care when it was other people’s money that they were losing? (The money of shareholders or bond holders).

But if the faith in the industry can be maintained then these kind of deals can at some time make the banksters and crooked production company bosses much more money than merely by drilling and fracking for shale gas or oil. Thus buying and selling drilling leases (bundled up together just like sub prime mortgages were) was a great money spinner for companies like Chesapeake. The greater the euphoria generated, the more money to be made. This is Deborah Rogers again:

“Aubrey McClendon, CEO of Chesapeake Energy, stated unequivocally in a financial analyst call in 2008: ‘I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 mcf.’”

Eight years later Aubrey McClendon was dead. He had been charged on a federal indictment of bid rigging from late 2007 to 2012 and drove his car at high speed into a bridge. There was a strong suspicion that he had killed himself.

The madness of shale goes on. Wall Street and the shale companies are still managing to play the same game of passing the risk parcel to the bigger fools who will take the loss. If people can be persuaded to buy into the companies just before they go bust then the smarter and bigger players can get out. At the time of writing (March 2016) there are suspicions that the banks are orchestrating a rise in the price of oil in order to help the shale companies raise capital which will enable them to pay off the banks while letting “the suckers” take the fall. This led one analyst to describe the glut, not just of oil, but of stupidity.

“Even the experts are stunned by this unprecedented glut in stupidity of managers of other people’s money: “Billions of dollars of dilutive equity continue to roll in with seemingly no end in sight,” Houston-based oil investment bank Tudor, Pickering, Holt & Co. said in a research note.” (http://oilprice.com/Energy/Crude-Oil/In-Risky-Move-Wall-St-Backs-Shale-With-Nearly-10-Billion-In-Equity.html)

Ethical or Financial Bankruptcy – which is more fundamental?

It is common in economics to refer to markets becoming frothy at times like this. Commentators seek to find the fundamentals underlying the “froth” (perhaps better described as scum). But what are “the fundamentals” in this story? The really fundamental thing is not that this sector is financially bankrupt – it is that it is ethically bankrupt too. An ethically bankrupt sector is definitely not sustainable. Any economic sector that destroys the environment including the climate, assaults public health and then enlists government in a corrupting endeavour to write and use the regulations in such a way as to undermine the very possibility of resistance is corrupt to the core. An industry that destroys people’s health and environment and then settles in court on condition that people are bound to secrecy about what has happened to them, as is common practice in the USA, cannot be trusted to tell the truth. It does not surprise in the least therefore that the unethical business methods of this sector, as well as the unethical methods of its allies in finance, also rely on trickery and defrauding anyone stupid enough to invest their money in it.

What will happen in the USA will no doubt have a big impact for the future credibility of the fracking industry in the UK and elsewhere in the world. That story is not yet in its final chapter but what has happened in the USA is already a cautionary tale and we would be stupid to ignore it. Local authorities in the UK should be careful that they are not caught out picking up the environmental costs of a collapsing industry. It has already happened in the USA and Canada – the advantage of limited liability to an industry without ethics is that it enables it to pass the cost of clearing up to communities after bankruptcies.

“CBC News reported that falling gas and oil prices have prompted many smaller companies to abandon their operations in Alberta, Canada, leaving the provincial government to close down and dismantle their wells. In the past year alone, the number of orphaned wells in Alberta increased from 162 to 702. At the current rate of work,
deconstructing the inventory of wells abandoned just in the past year alone will be a 20-year task.” (Source: Johnson, T. (2015, May 11). Alberta sees huge spike in abandoned oil and gas wells. CBC News. http://www.cbc.ca/news/canada/calgary/alberta-sees-huge-spike-in-abandoned-oil-and-gas-wells-1.3032434 )

In conclusion – a mountain of debt that will never be repaid?

People might ask, if the future of fracking is so much in doubt then why bother to build a movement of opposition to oppose it? The answer can be expressed by adapting a famous quote by John Maynard Keynes. In the original Keynes says “the market can remain irrational longer than you can remain solvent”. The market can also remain irrational long enough to do a lot of damage. What this article has barely done at all is refer to what are called, in economics-speak, the “external costs” of fracking – the damages to climate, to local environments and to public health. Nor has this article examined the claimed benefits to employment and to local economies which are usually grossly overstated. There is now plenty of evidence about these things. What I have tried to do instead is to show that even in the narrowest of meanings of “economic” fracking does not make sense. A lot of damage is being done and there will be little positive to show for it. The ability to continue this destructive path is due to the legacy of political influence of the fossil fuel lobby in government and in the finance sector. The legacy influence has been strong enough to ignore and crush the opposition despite the damage. In the USA it can be argued that the fracking boom has been an irrational, unethical and ultimately unprofitable attempt to extend the lifetime of fossil fuels in order to keep the oil and gas industry in work, aided and abetted by Wall Street. It is an industry trying to secure a future for an influential network of professional and business interests that should, in truth, be being wound down – including the engineers, the university departments of petroleum geology, the regulators to name a few. A mountain of debt has been accumulated to perpetuate the illusion that these people have a future in which they can go on much as before – a mountain of financial debt that will never be repaid.

Stupidity has a knack of getting its way – Albert Camus

Sources and further reading:

On geological uncertainties: Mason Inman “Can Fracking Power Europe?”, March 2016 at http://www.scientificamerican.com/article/can-fracking-power-europe/

Charles Newbury, “Struggles to cut cost delay oil production in Argentina” Platts Oilgram News. August 17th 2015 at http://blogs.platts.com/2015/08/17/cut-cost-delay-oil-play-argentina/

Low Gas price vs high extraction costs: Zachery Davis Boren, Greenpeace Energy Desk; August 2015 http://energydesk.greenpeace.org/2015/08/20/super-low-gas-price-spells-trouble-for-fracking-in-the-uk/

European natural gas supply and demand: https://www.oxfordenergy.org/publications/the-outlook-for-natural-gas-demand-in-europe/ and https://www.oxfordenergy.org/wpcms/wp-content/uploads/2016/01/Gazprom-Is-2016-the-Year-for-a-Change-of-Pricing-Strategy-in-Europe.pdf

Oil Majors as a source of investment capital http://www.telegraph.co.uk/business/2016/02/12/oil-firms-urged-to-avoid-dangerous-investment-cuts /

Deborah Rogers, “Shale and Wall Street” Energy Policy Forum 2013) http://shalebubble.org/wp-content/uploads/2013/02/SWS-report-FINAL.pdf

Fragility of UK explorer’s finances: http://www.companywatch.net/wp-content/uploads/2016/01/oil-and-gas-smaller-cap-research-11-January-2016-final.pdf

Crisis in US Shale Sector: http://www.bloomberg.com/news/articles/2016-03-11/oil-boom-fueled-by-junk-debt-faces-19-billion-wave-of-defaults

Arthur Berman “The Miracle of Shale Gas and Tight Oil is Easy Money” http://www.artberman.com/the-miracle-of-shale-gas-tight-oil-is-easy-money-part-i/

http://www.artberman.com/art-berman-shale-plays-have-years-not-decades-of-reserves-february-23-2015/

http://www.cnbc.com/2016/03/02/ex-chesapeake-ceo-mcclendon-dies-in-car-wreck-day-after-indictment.html

Ryan Dezember, Nicole Friedman and Erin Aillworth. “Key Formula for Executives Pay: Drill Baby Drill” http://www.wsj.com/articles/key-formula-for-oil-executives-pay-drill-baby-drill-1457721329

“Energy in the economy”: Brian Davey Credo. Economic Beliefs in a World in Crisis Feasta books 2015. http://www.credoeconomics.com Chapters 32 and 33.

Our Electricity Problem: Getting the Diagnosis Correct

City Lights 2012 - Flat mapgc2reddit-logoOff the keyboard of Gail Tverberg

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Published on Our Finite World on October 14, 2015

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What is really wrong with our energy system, particularly as it relates to electricity and natural gas? Are there any mitigations available? I have been asked to give a talk at an Electricity/Natural Gas conference that includes both producers and industrial users of electricity and natural gas.

In this presentation, I suggest that the standard diagnosis of the problems facing the energy system is incomplete. While climate change may be a problem, there is another urgent problem that attendees at the conference should be aware of as well–affordability, and the severe near-term impact affordability can be expected to have on the system.

My written summary of this talk is fairly brief. I have not tried to repeat the information shown on the slides. This is a link to a copy of my presentation: Our Electricity Problem: Getting the Diagnosis Right

Slide 2

 

 

 

 

Slide 2

A finite world is one that is subject to limits. Its economy cannot grow forever for many reasons.

Slide 3

 

 

 

 

Slide 3

Let’s look at some examples (Slide 4) of how limits work in finite systems. Often there seems to be a change of direction.

Slide 4

 

 

 

 

Slide 4

The standard story that we hear says that energy prices can rise and rise, indefinitely. But as I look at the data, this doesn’t seem to be true in practice. At some point, there is a problem with affordability, because wages don’t rise as the price of energy products grows.

Slide 5

 

 

 

 

Slide 5

In many ways, the problems that overtake the economy are similar to ailments that beset a human being. A person can have multiple ailments, some of which grow in severity over the years. The catch, of course, is that if an early ailment becomes severe, it may kill the patient, eliminating the need to fix the later ailments.

The way I see the economy, there are many hurdles that have the potential to inflict severe damage on the economy. Slide 6 shows a few of them. Some examples of other issues include lack of fresh water and erosion of topsoil.

In my view, we are right now reaching an affordability crisis. One way it manifests itself is as high commodity prices that fall and thus become low commodity prices. Falling commodity prices are likely to cause debt-related problems because of all of the debt incurred in their production. We may find financial problems, much worse than those experienced in 2008, back again.

Slide 6

 

 

 

 

Slide 6

Many others have focused on climate change. In their view, we can extract pretty much all of the fossil fuels that are in the ground, because prices will rise higher and higher, allowing this to be done.

If, in fact, prices fall after a point, then there is a good chance that we must leave most of them in the ground because of affordability issues. If this is the case, the situation may be very different: we may lose fossil fuel production in not many years because of disruptions caused by low prices.

We often think of affordability in terms of what a gallon of oil costs or in terms of how much a kilowatt-hour of electricity sells for. While these costs are one part of the problem, a big part of the affordability problem relates to big-ticket items, as listed in Slide 7.  If customers cannot afford these big-ticket items, such as homes and cars, the economy loses both (a) the energy use that would be required to make these big-ticket items, and (b) the later energy use that these big items would require.

Slide 7

 

 

 

 

Slide 7

If we look at the data, we find that inflation-adjusted median income for families has been falling.

Slide 8

 

 

 

 

Slide 8

Part of this lower family income involves a smaller share of the population working.

Slide 9

 

 

 

 

Slide 9

When a person looks at the labor force growth split between men and women, there is a very different pattern. Men show a small downward trend over time; women increasingly joined the labor force, but this trend topped out in 1999, and became a decline since 2008.

Slide 10

 

 

 

 

Slide 10

Something we all are aware of:

Slide 11

 

 

 

 

Slide 11

Many fewer homes are now being built in the United States.

Slide 12

 

 

 

 

Slide 12

There has been a very different trend in auto purchases in the United States, Europe, and Japan compared to the rest of the world. In the developed areas, interest rates have been very low, and lenders have increasingly offered loans to subprime buyers. An increasing number of the loans are 7-year loans, and the loan to value ratio is often 125%. We seem to be creating a new subprime auto bubble. Based on our experience with subprime housing loans, this is not a sustainable pattern.

Slide 13

 

 

 

 

Slide 13

I am convinced that most economists have missed a basic principle regarding how economic growth takes place (Slide 14). I define efficiency in terms of what it takes in terms of human labor and resources to produce finished output, such as a barrel of oil or a kilowatt-hour of electricity. Are these finished goods becoming cheaper or more expensive in inflation-adjusted terms?

On Slide 18, note the change in the size of the output boxes, compared to the input boxes. Increased efficiency produces more output compared to the resources used; increased inefficiency produces less output compared to the resources used.

If an economy is becoming increasingly efficient, a given number of workers and a given amount of resources can produce more and more goods. This is good for economic growth. Growing inefficiency is a problem, because it quickly uses up both available worker-time and available resources. Many economists never seem to have gotten past the idea, “We pay each other’s wages.” Yes, we do, but if those wages are being used to encourage the use of increasingly inefficient processes, we go backwards in terms of economic growth.

Slide 14

 

 

 

 

Slide 14

If we look back historically, we can see a growing efficiency pattern with electricity, in the 1900 to 1998 period. As the price dropped, both consumers and businesses could afford more of it (illustrated with rising black “demand” curve). Part of the lower cost came from increased efficiency of electricity generation during this period.

Slide 15

 

 

 

 

Slide 15

If we look at the oil sector, since about 1999 we have had exactly the opposite pattern taking place. The cost of oil “exploration and production capital expenditures” has been rising at a rapid rate. This is an issue of diminishing returns. We have already extracted the easy-to-extract oil, and as a result, we need to move on to more difficult (and expensive) to extract oil. Thus we are becoming increasingly inefficient, in terms of the cost of producing the end product, oil.

Slide 16

 

 

 

 

Slide 16

As we move on to more expensive oil, the higher cost tends to squeeze budgets. The thing that is important is the fact that wages don’t rise sufficiently to cover the cost increase; in fact, the images I showed earlier seem to suggest that in the recent era of high prices, we have seen unusually slow growth in wages. The amount of wages is represented by the size of the circles in Figure 17.  The wage circles don’t grow.

Slide 17 shows that as workers need to spend more for oil, and for the things that oil is used to make, such as food, the discretionary portion of their budgets (“everything else”) is squeezed. This shift in discretionary spending is what tends to lead to recession. The same principle works if consumers suddenly find themselves with higher electricity bills–discretionary spending is again squeezed.

Slide 17

 

 

 

 

Slide 17

The problem that squeezes all commodities at the same time is falling discretionary income. The amount of debt that can be borrowed also tends to fall as discretionary income falls. The combination leads to falling affordability for expensive goods, like new autos and new homes.

The price patterns for commodities of many types move together, reflecting a combination of rising cost of oil (because of higher extraction costs) and falling ability of consumers to afford the high prices of these goods. I have not included food on Figure 18, but many food prices have recently fallen as well.

Of course, the costs for producers creating these commodities have not fallen proportionately, and many have huge amounts of outstanding debt. Repayment of debt becomes difficult, as prices remain low.

Slide 18

 

 

 

 

Slide 18

Back at Slide 14, I talked about increased efficiency leading to economic growth, and increased inefficiency causing economic contraction. Because our leaders have not looked at things this way, they have encouraged increased inefficiency in many areas, as I describe on Slide 19. To some extent, this increased inefficiency is required. For example, as population grows in areas with low water supplies, the need for desalination grows. Also, pollution problems increase as we use lower qualities of coal and oil.

Slide 19

 

 

 

 

Slide 19

What are the expected impacts on the electricity industry and on natural gas? Are there any workarounds?

Let’s look at a few implications of the problems we now see.

In my view, low oil and natural gas prices are likely to be a huge problem for the natural gas industry, leading to the bankruptcy of many natural gas suppliers.

We cannot expect natural gas supply to grow. In fact, we cannot expect a coal to natural gas transition because the natural gas price won’t rise high enough, for long enough.

Slide 21

 

 

 

 

Slide 21

If we look at the history of US natural gas prices (using Henry Hub data), we see that prices have tended to stay low, after the 2008 spike. This was a great disappointment to those who built new natural gas extraction capability. They expected prices to rise, to justify their new higher costs. In my view, the continued low natural gas prices to some extent already reflect affordability issues.

Slide 22

 

 

 

 

Slide 22

The Marcellus Shale was perhaps the most successful of the new natural gas production, but it seems to now be topping out because of low prices (Slide 23).

Many producers will have their lending terms reevaluated using September 30, 2015 data. This reevaluation is likely to lead to bankruptcy of some producers, and cutbacks of production of other producers.

Slide 23

 

 

 

 

Slide 23

Coal use has been declining, as shown in Slide 24. Coal has some of the same problems as natural gas, as I will explain on Slide 25.

Slide 24

 

 

 

 

Slide 24

The basic issue is that coal prices are too low for most producers. Even if a particular producer has low extraction costs, this benefit is not enough to keep producers from bankruptcy. The problem that occurs is that coal companies are locked into high cost structures because of patterns that continue to persist from when prices were high. Lease costs are high; taxes and royalties are high; often debt was entered into, assuming that revenue would remain high in the future. Now revenue is lower, and there is no way to fix the “hole” that results from low prices. Production stays high, because each producer must produce as much as possible, to try to avoid bankruptcy for as long as possible.

Slide 25

 

 

 

 

Slide 25

Coal is in a sense ahead of natural gas, in terms of bankruptcies, with big bankruptcies already starting.

With prices as low as they are, there is little chance for a new producer to come in, buy the production facilities at a low price, and restart operations. A big issue is ongoing costs such as royalty payments that cannot be eliminated. Another is debt availability to support the new operations.

Slide 26

 

 

 

 

Slide 26

Bankruptcies are likely to interrupt supply chains as well. Part of the problem may simply be the excessively high cost of credit, for those members of the supply chain with poor credit ratings. Once a supply chain breaks, replacements parts may not be available. Other services that a company contracts for with outside suppliers may disappear as well.

As I note on Slide 27, customers may have financial difficulties. Those who remain in business will tend to buy less, so demand is likely to be lower, rather than higher. Companies producing electricity should not be misled by the rosy forecasts of the EIA and IEA regarding future demand amounts.

Slide 27

 

 

 

 

Slide 27

Slide 28 shows that industrial consumption of energy products has been falling since the 1970s, as industrial production has moved overseas. Now the dollar is high relative to other currencies, encouraging more of this trend. On a per capita basis, residential energy consumption is down, and commercial energy consumption is level. It is hard to see that this mix will provide very much of an upward trend in natural gas and electricity consumption in the future. (Note: Slide 28 shows energy of all types combined, including both electricity and fuels burned directly. This approach is used because there has been a shift over time to the use of electricity. This method shows the overall trend in energy use better than, say, an electricity-only analysis.)

Slide 28

 

 

 

 

Slide 28

The major ways subsidies for wind and solar PV are available are through greater government debt or through higher costs passed on to customers. There are now getting to be pushbacks in both of these areas.

Slide 29

 

 

 

 

Slide 29

In Europe, the cost of intermittent electricity tends to be passed on to consumers. Dr. Euan Mearns put together the chart shown in Slide 30 comparing price of electricity with the per capita wind and solar PV generation installed for European countries. There is a striking correlation. Countries with more installed wind and solar PV tend to have higher electricity prices for the consumer.

Slide 30

 

 

 

 

Slide 30

Given the problem with commodity producers not being able to collect high enough prices for their products, and the large number of resulting bankruptcies, a person comes to the rather startling conclusion that the ideal structure for electricity providers in today’s economy is that of a vertically integrated utility. In other words, an electric utility should directly own its suppliers, as well as transmission lines and everything else needed to produce and distribute electricity.

Utilities have traditionally had the ability to price on a cost-plus basis. With vertical integration, the utility can use its pricing ability to keep prices for fuel producers from falling too low, and thus sidestep the problem of bankruptcies. To the extent that the required price for electricity keeps rising, it will tend to pressure discretionary spending. (See Slide 17.) But at least grid electricity will be among the last to “go” under this structure.

Slide 31

 

 

 

 

Slide 31

Black Hills Corporation lists the many electricity-generating facilities it owns (coal and natural gas), and the places it has arrangements to sell this electricity as a utility. The Black Hills Corporation indicates it has had 45 years of dividend increases. This increase in dividends is in stark contrast to the many coal and natural gas producers that are currently near bankruptcy, as a result of low coal and natural gas prices.

Slide 32

 

 

 

 

Slide 32

How does one resolve the conflict between industrial companies wanting to generate their own electricity (for a variety of reasons) and the need to have an electric grid for everyone else? It seems to me that we have to keep in mind that having an operating electric grid for everyone else is absolutely essential. Without the electric grid, gasoline stations would stop pumping gasoline and diesel. Transportation would stop. Electric elevators would stop. Treatment of fresh water and sewage would stop. Companies everywhere would lose their consumers. The economy would quickly come to a halt.

With our current affordability problems, we are in danger of losing the electric grid. That is why it is essential that those who opt out not be given too large a credit for providing some or nearly all of their own electricity. The credit given to industrial companies should reflect the savings to the system, no more.

Slide 33

 

 

 

 

Slide 33

One concern is the bankruptcy of peaker plants, if their use is significantly reduced by, for example, the use of solar PV. If these peaker plants continue to be needed for balancing purposes, this may be a problem. Another concern is the rising cost of grid transmission for those who continue to get their electricity from the grid.

Slide 34

 

 

 

 

Slide 34

To sum up, the story we read from most sources is so climate-change focused, a person wonders if there aren’t other issues that are important as well. Most observers have overlooked the importance of low commodity prices, and the impact that they can have on coal and natural gas producers’ ability to produce the fuels that are needed by electric utilities.

Too much faith is being placed in natural gas, as the fuel of the future. And too much faith is being placed on intermittent renewables, without fully understanding their costs and limitations.

I haven’t tried to address the many indirect problems arising from many bankruptcies. These may be severe.

Slide 35

 

 

 

 

Slide 35

Russia, China, Iran: In sync

Off the keyboard of Pepe Escobar
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S-300 (RIA Novosti / Alexey Danichev)

Originally published in RT on April 16, 2015


Over past decades, the pre-fabricated myth of an elusive “Iranian bomb” was never the real issue between the US and Iran; the issue was how to subdue – or “isolate” – a powerful, independent nation that refused to toe the exceptionalist line.

Now that the “rehabilitation” of Iran – at least for some exceptionalists and their minions – may be imminent, pending a nuclear deal to be clinched in June, various Washington factions still can’t get their act together.

The Pentagon has all but admitted the perennial wet dream of neocons and corporate media remains on the table; the military option.

The US Congress will go no holds barred in trying to scotch the deal. The US Senate Foreign Relations Committee unanimously passed a bill that would give Congress the right to interfere with anything related to the removal of sanctions.

Iranian Foreign Minister Mohammad Javad Zarif faces an even more uphill battle as the “fact sheet” the Obama administration insisted it needed to release to make the case in Washington complicates how the nuclear deal may be received in Iran. To top it off, “fact sheet” or not, the case was not made in Washington after all.

And now the usual suspects – from the State Department to Congress and the Israel lobby – are predictably going bonkers on a demented “Putin selling missiles to the ayatollahs” narrative.

Got “S”, will sell

What Russian President Vladimir Putin has just done is to get back to business as usual; even before sanctions are lifted, he signed a decree lifting Moscow’s own ban on the delivery of the S-300 surface-to-air anti-missile system to Tehran, following an $800 million 2010 contract that was not fulfilled due to relentless US pressure. Tehran expects to receive the S-300 by the end of the year.

Moscow’s official line has always been that the arms embargo on Iran must be lifted as soon as a final nuclear deal is clinched. The Obama administration insists that sanctions must be removed gradually. Tehran, from Supreme Leader Ayatollah Khamenei on down, is adamant that sanctions must be lifted“on the day of the deal”, in Khamenei’s words.

The Supreme Leader had added a conciliatory note though, remarking that, “if the other side avoids its ambiguity in the [nuclear] talks, it’ll be an experience showing it’s possible to negotiate with them on other issues.” That remains a galaxy-sized “if”.

Russian Foreign Minister Sergei Lavrov (R) shows the way to his Iranian counterpart Javad Zarif during a meeting in Moscow (Reuters / Maxim Zmeyev)

Russian Foreign Minister Sergei Lavrov (R) shows the way to his Iranian counterpart Javad Zarif during a meeting in Moscow (Reuters / Maxim Zmeyev)

Meanwhile, and in sync, the director-general of Russia’s top weapons exporting company Rosoborobexport, Anatoly Isaykin, confirmed China has just bought S-400 missile defense systems from Russia. Beijing is the first in a long list of foreign buyers – as the Russian defense industry is obliged to give priority on the S-400s to the Russian Defense Ministry

Each S-400 is capable of launching up to 72 missiles, engaging up to 36 targets simultaneously, and shield territory from air strikes, strategic, cruise, tactical and operating tactical ballistic missiles, and medium-range ballistic missiles. It’s been operational since 2007, replacing the S-300 systems now sold to Iran.

The crucial issue is that the S-300s will render Iran’s air defenses virtually secure against anything the Pentagon may throw at them, except fifth-generation stealth fighters. And these – the S-300 and S-400 – are not even Russian state-of-art; that would be the S-500 system, which I’ve referred to here, capable of definitely sealing Russian – and any other – territory from anything the Pentagon may come up with.

Strategically in sync

The simultaneous rolling out of the S-300s and S-400s to Iran and China are yet one more graphic example of the strategic partnership involving the three Eurasian nations that actively contest the hyperpower’s hegemony. They are certainly in sync.

In parallel, discreetly, Moscow has already started, in practice, a $20 billion oil-for-goods swap with Tehran – exchanging grain, equipment and construction materials for up to 500,000 barrels of Iranian crude a day. According to Deputy Foreign Minister Sergei Ryabkov, “this is not banned or limited under the current sanctions regime.”

Ryabkov only stated the obvious; “It takes two to tango. We are ready to provide our services and I am sure they will be pretty advantageous compared to other countries…We never gave up on Iran in a difficult situation…”

Tehran responded in sync, via the Chairman for the Committee for Foreign Policy and National Security of the Islamic Consultative Assembly of Iran, Alaeddin Boroujerdi; Iran is ready to expand cooperation with Russia in all spheres at the highest level. Crucially, “this is also the opinion of our supreme religious leader Ayatollah Ali Khamenei about development of relations with Russia.”

The usual suspects, as usual, are clinging to any argument that “proves” Russia-Iran cooperation is doomed. For instance, “rehabilitated” Iran will doom Russia’s energy industry because of the “serious impact” on the oil market from Iran’s increased supply and competition with gas exporter Gazprom.

Ryabkov dismissed it by going straight to the point; “I am not confident as yet that the Iranian side would be ready to carry out supplies of natural gas from its fields quickly and in large quantities to Europe. This requires infrastructure that is difficult to build.”

This infrastructure upgrade is costly and will take years; it may happen, but with help from – once again – the Russians and the Chinese. Russia will be back in play in full force in Iran’s energy sector, as Gazprom, its oil arm, Gazprom Neft, and Lukoil had to put on hold many projects because of sanctions. Rosatom, for its part, will be able to clinch further contracts at the Bushehr nuclear power plant.

The EU – and especially the US – are betting on Iran’s “rehabilitation” as an economic/political bonanza; the first real benefit would be Tehran becoming a supplier to yet another troublesome ‘Pipelineistan’ gambit, the Trans-Anatolian (TAP) gas pipeline, which may – or may not – be finished by 2018. TAP will supply gas to the EU via Turkey, but it’s still unclear how much gas potential suppliers – Azerbaijan or Iran – are able to commit.

TAP coming online does not mean Gazprom’s exports to the EU must be cut down. In fact, what Russian and Iranian officials have been discussing for a while now is how profitable exporting to the EU may be for both nations. Besides, Russia has still another key ‘Pipelineistan’ card to play – Turkish Stream, which will channel Russian gas to Turkey and Greece.

And yes, Gazprom is getting ready to be a key provider to two essential markets at the same time. Here’s what Gazprom’s CEO Alexei Miller told Rossiya-24: “The resource base of Western Siberia is a resource that is used for delivering gas for exports to Europe. In other words, at this point we are on the cutting edge when actual competitiveness will begin for our energy resources between two mega-markets: Asian and European.”

SWIFT business

Beijing, meanwhile, has also been on the offensive. As a top energy supplier – of both oil and gas – Iran is a matter of Chinese national security. So even with sanctions after sanctions, the US government was always forced to renew waivers for China, as Beijing kept importing energy from Iran at will.

Reuters / Petar Kujundzic

Reuters / Petar Kujundzic

Iran is an absolutely key node of the Chinese-led New Silk Road(s) – be it as part of the land route or as part of the Maritime Silk Road, which will touch the port of Chabahar. And the China-Iran partnership does not span only close ties on energy and trade/commerce; it also includes advanced Chinese defense technology, and Chinese input in Iran’s ballistic missile program.

China created a parallel SWIFT system to pay Iran for energy; Tehran, after the nuclear deal, will be free to access these funds in yuan. Iranian energy executives have already been to Beijing to discuss Chinese investment in the Iranian energy industry. Sinopec and CNPC will be instrumental in developing projects in the South Pars gas fields – the largest in the world – and in the monster Yadavaran and North Azadegan oil fields.

For Iran, all this will happen in parallel with European energy giants investing in liquefied natural gas (LNG) development and technology.

Investing in multiple fronts, China will also be instrumental in its push to finally help complete the much-troubled Iran-Pakistan (IP) pipeline, which in the future may even include an extension to Xinjiang.

Xi does Tehran

The icing in this vast energy cake is how both Russia and China are deeply committed to integrating Iran into their Eurasian vision. Iran may finally be admitted as a full member of the Shanghai Cooperation Organization (SCO) at the upcoming summer summit in Russia. That implies a full-fledged security/commercial/political partnership involving Russia, China, Iran and most Central Asian’stans’.

Iran is already a founding member of the Chinese-led Asian Infrastructure Investment Bank (AIIB); that means financing for an array of New Silk Road-related projects bound to benefit the Iranian economy. AIIB funding will certainly merge with loans and other assistance for infrastructure development related to the Chinese-established Silk Road Fund.

And last but not least, the China-Iran strategic partnership will be discussed in detail as Chinese President Xi Jinping visits Tehran next month.

It’s easy to remember how Iran was relentlessly derided as “isolated” by the exceptionalist crowd only a few months ago. Yet the fact is it was never isolated – but painstakingly building blocks towards Eurasian integration.

European firms are of course itching to unleash an avalanche of investment in the Iranian market post-sanctions, and most of all the energy giants badly yearn to lessen EU’s dependency on Gazprom. But they’ll be facing formidable competition, as it was up to Moscow and Beijing to identify, a long time ago, which way the wind was blowing; the inevitable (re)emergence of Iran as a key Eurasian power.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.


Pepe Escobar is the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007), Red Zone Blues: a snapshot of Baghdad during the surge (Nimble Books, 2007), and Obama does Globalistan (Nimble Books, 2009).

Shale Gas & Fracking: Science or Propaganda?

Off the keyboard of Brian Davey

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Published on FEASTA on April 9, 2014

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Discuss this article at the Energy Table inside the Diner

Shale Gas and Fracking: The science behind the controversy – review by Brian Davey

By Michael Stephenson, Elsevier, 2015. Michael Stephenson is Director of Science and Technology at the British Geological Survey.

Anyone looking for a comprehensive review of the controversies associated with fracking is going to be disappointed by this short book. After having ploughed almost all of its 170 pages I found, near the back, the following sentence:

“I won’t go through all of the contested issues, because the chapters in the book provide a basis to carve out your own analysis looking at some of the main peer reviewed papers”.

So the message is that if you want to make up your mind about shale then go to the peer reviewed literature. The implied message in this, made explicit at times, is that many opponents of the shale gas industry don’t do this and many members of the public rely too heavily on rumour and panicked reports leading to what Michael Stephenson claims is a low quality to the public policy debate. The public policy debate needs to be guided by academic scientists in peer reviewed papers…..like him.

As he writes, towards the end of this book:

“In this book I hope I have shown how a controversial subject can be tackled with science. There are various definitions of science around. One that I like is “…a systemic endeavour that builds and organises knowledge in the form of testable explanation and predictions about the universe.”

“I like the word endeavour because it implies that a lot of science is slow and may be painstaking. I also like the bit about testable explanations and predictions. Most science is a long journey, which sometimes goes in the wrong direction, but this element of testable explanation, usually means it gets back on the right track….If it is properly funded, if the scientists are listened to and if their results are out there for all to see then the public debate is better, and policy and regulation are better. ” (p 145 )

While reading this particular passage, sitting in the library of the British Geological Survey in Keyworth near Nottingham, I had to suppress the urge to blow a raspberry.

A lot of science is slow and painstaking Stephenson tells us, and it sometimes goes off on the wrong direction but don’t worry, with more time it will get back on track.

Well, how much time do we have, Professor Stephenson? Leaving aside for now which side of the issue he would come down on, would Professor Stephenson not agree that the stakes are incredibly high? The stakes are high because they concern whether people are to have their living environment and their health ruined, or not. They are high because they concern whether shale gas contributes to triggering runaway climate change, overshooting 2 degrees above pre-industrial temperatures, or not. So how much time do we have to solve these problems?

The facts are uncertain and in dispute and there is a lot at stake and Professor Stephenson is telling us that the process must be slow and painstaking. Yet the government had already made up its mind by 2012. It had taken all the important decisions about pushing this industry – with people like Stephenson giving it cover. By January of that year Stephenson had already published an article in New Scientist titled “Frack responsibly and risks and quakes are small.”

So if science is slow and needs time for scientists to debate things based on the evidence from peer reviewed articles – how come Mike Stephenson already knew 3 years ago that “responsible fracking” had low risks? What about all the evidence gathering that was so necessary to come to that conclusion?

As it turns out three quarters of the available studies on the impacts of shale gas development were published in the two years 2013 and 2014. The number of peer reviewed studies doubled between 2011 and 2012 and then doubled again between 2012 and 2013 while in 2014 there were at least 154 peer reviewed studies. The bad news for Mike Stephenson is that almost all reveal problems with fracking. Might it be that Mike Stephenson came to a provisional conclusion 3 years ago and assumed that he did not have to change his mind? Or might it be that he has not been keeping pace with the literature since then?[1]

I don’t know the answer to these questions but it seems fair to me to ask. If you are going to profile yourself as an advocate for scientific research and peer reviewed articles deciding policy, after having “raised the quality of public debate”, then it seems to me you ought to regard yourself as also being under corresponding ethical obligations. These include:

(1) not finally deciding before the evidence is in, or at least taking pains to explain that your opinion is provisional and might be revised with more information;

(2) attempting some coverage of all the major controversial issues rather than just choosing a small sample of issues for your review of the peer reviewed literature and then covering other issues in a less thorough way or not mentioning them at all;

(3) making an effort to take in and accurately presenting points of view that are not your own;

(4) staying up to date on the scientific debates in dispute.

In this review I intend to show that Mike Stephenson has not done these things. As already pointed out he wants to say – you must do your own peer review process of the controversial issues. Well, anyone who wants an in depth understanding will indeed have to but it’s a very convenient approach for the author to deal with some issues and then not to deal with the others. A casual reader with little time could easily read this book, and assume that by doing so they have got the gist of the main arguments, and that they do not need to read further. If they did do this it is my contention that they would be left with an extremely misleading impression. Many problems with fracking that are now emerging in peer reviewed articles would remain unknown – out of sight out of mind. They would be unknown unknowns.

Climate Policy

Nor do I think that Stephenson has done a very good job of presenting alternative viewpoints – particularly in the debate about climate policy. He relies heavily on an approach to climate policy advocated first of all several years ago by S. Pacala and R. Socolow of Princeton University, the so called “stabilisation wedges” approach. This is an approach, in case you did not know it, that is sponsored by BP. It is also NOT about reducing global emissions but is about keeping emissions “flat” over the next 50 years. It is about stopping emissions growing until such time as the world has developed the capacity for carbon capture and underground storage. [2] Such a policy would, of course, be another great job creation scheme for geologists for it is they that would have to identify the safe places for underground storage. At the same time the fossil fuel industry, having played the major role in digging or pumping carbon out of the ground would now be able to make big money pumping the CO2 back into the ground.

The problem with this approach of course is that the world does not have time to stabilise emissions according to the agenda of BP. Emissions have to fall and very fast indeed if the world is to have any chance of not overshooting a 2 degree temperature increase over the pre-industrial. Leading climate scientists like those of in the Tyndall Centre are quite clear on this. Scientists like Kevin Anderson of Manchester University had repeatedly made submissions to parliament making this point drawing on the peer reviewed science that they have done. In a blog that Anderson put on this own website in January of this year he explains [3]:

“Shale gas within 2 degrees C carbon budgets. The development of a UK shale gas industry is incompatible with UK’s equitable share of the IPCC’s carbon budget for a “likely” chance of not exceeding the 2 degrees C obligation. This remains the case even if shale gas can be combined with carbon capture and storage (CCS) technologies. The CO2 emissions from gas CCS are anticipated to be 5 to 15 times greater per kWh of electricity generated than are the emissions from either renewable or nuclear. Add to this the timeframe for developing a mature UK shale gas industry and, even with CCS, shale gas can have no appreciable role in the UK energy mix”.

Fugitive emissions

Now let’s turn to the issue, mentioned in the book, of “fugitive emissions”. As Stephenson acknowledges, the real killer for any argument that natural gas is better for the climate than coal is evidence about so-called “fugitive emissions”. This is a phrase used to describe the leakage of natural gas or methane into the atmosphere during the production and distribution of natural gas. Since natural gas is mainly methane and since methane is a very powerful greenhouse gas, much more powerful that CO2, a high level of leakage would completely undermines the case for shale gas. If fugitive emissions are high then the argument for natural gas is lost – if they are low then there is a case that natural gas is a lower carbon energy source (although whether it is low enough, given the need to rapidly reduce emissions, is another question). So what’s the situation and how does Stephenson describe it in this book?

As Stephenson says there are two ways of trying to measure fugitive emissions – the bottom up method, measuring leakage in and through equipment and the top down method from aircraft, towers and so on. The two methods of measurement give very different results and if the airborne measurements are the more accurate ones then the verdict goes against natural gas on climate grounds. So this is a crucial question – and what concerns me here is how well the author tells this particular story and presents the evidence.

In my judgement – he does not do a very good job. He presents just one study about airborne measurement by Scott Miller et al. which does not fit his preferred view and then tries to dissuade the reader about the top down measurements:

“Are these broad brush atmospheric measurements more reliable than the patchy measurements from actual well operations? Perhaps, but can we be sure that the aircraft measurements are attributing methane to the right sources, after all swamps and municipal waste dumps produce methane – as do cattle. And cattle are common in Texas” (p 117)

Later the reader is again leaned on as to how to interpret the balance of the literature. On page 144 we are told

“Now taking the issue of whether shale gas is lower carbon than coal the conclusion of a balance of peer reviewed articles is that it probably is. Although shale gas does come with fugitive emissions, these probably don’t offset the ‘carbon savings’ that you get by using shale gas rather than coal in a power station. But the conclusion is tentative because it does step from a rather small number of measurements that suggest that fugitive emissions aren’t particularly large and does go against one study (Howarth’s group at Cornell University) that suggests large fugitive emissions”.

Note that by this stage in his book the top down airborne emissions measurements have disappeared from Stephenson’s presentation of the issues. No mention of Scott Miller here. Has Scott Miller been dismissed because he and his team might be measuring cattle burps after all?

Cattle that burp propane…and missing studies that don’t make it into this book

When I read this I went off in search of the Scott Miller article and an academic friend easily dug out a few more articles about the airborne measurement of emissions from the academic literature. Surprise surprise – Scott Miller et al were well aware of cattle, municipal waste dumps and other sources of methane. In fact their paper was not just about oil and gas field sources of methane. It was arguing that there is a general underestimate of methane emissions, including from cattle. It was also about tracking down the different sources and in regard to confusing cattle emissions with gas field ones his article says this:

“Texas and Oklahoma were among the top five natural gas producing states in the country in 2007and aircraft observations of alkanes indicate that the natural gas and/or oil industries play a significant role in regional CH4 emissions. Concentrations of propane (C3H8), a tracer of fossil hydrocarbons, are strongly correlated with CH4 at NOAA/DOE aircraft monitoring locations over Texas and Oklahoma (Fig. 5). Correlations are much weaker at other locations in North America ( to 0.64). “

So what is going on here Professor? Do Texas cattle burp propane?

As I wrote earlier, if you’re going to argue for peer reviewed science settling issues then you really are going to have to do a literature search to see if there are other relevant articles. In this case there are. For example, there is an article by Anna Karrion and team in the Geophysical Reserach Letters in 2013 [5]

Their article is titled “Methane emissions estimate from airborne measurements over
a western United States natural gas field”. It was published in August 2013 so there are no excuses for not finding and citing it. The measurements were taken over the Uintah gas field in Utah in February 2012 where 6.2 to 11.7% of production was found to be leaking. This level of methane leakage is a disaster for the climate – and a disaster for the argument of Professor Stephenson too.

But perhaps this was cattle burping? However the Karrion research team did adjust their measurements for cattle and natural seepage. These adjustments were based on a study of methane emissions from free range cattle combined with census data of cattle for this region, available from the US department of Agriculture. Another study of methane seepage was also taken into account. It is interesting to compare the magnitudes. The research team only shaved 2.5% off their measured gas flux to correct for cattle and natural seepage – with the rest of the measurement being oil and gas field related. The other 97.5% of the gas was from the field.

There was no excuse for not mentioning this. In fact there have since been other studies.
I do not know when Stephenson’s book went to press but 6 months before its recent release there was another study by Schneising et al. that used satellite data for the Bakken and Eagle Ford formations. Scientists from Germany, the United Kingdom and the University of Maryland show 10.1% (plus or minus 7.3%) and 9.1% (plus or minus 6.2%) for the Bakken and Eagle Ford formations respectively.[6]

Flaws in the inventory measurement of methane emission rates

To complete that argument let’s look closer now at the sources that Professor Stephenson bases himself on – the studies by MacKay and Stone and by Allen et al at the University of Texas. Here I am relying heavily on free lance researcher Paul Mobbs because he has done a study a critique of MacKay and Stone, which contains a critique of the Allen paper too. Basically Mobbs argues that the figures that MacKay and Stone use for leakage are too low and the figures that they use for gas production are too high. Thus the percentage of gas production leaking is miscalculated [7]. Let’s walk through this argument.

Firstly, Mobbs points out how the inventory method of measurement of leakage that MacKay and Stone use has been challenged. He cites an article in Nature which refers to the Colorado measurements from airplanes plus a new study in press of the Denver–Julesburg Basin conducted with scientists at Picarro, a gas-analyser manufacturer based in Santa Clara, California. The later study relies on carbon isotopes to differentiate between industrial emissions and methane from cows and feedlots, and the preliminary results line up with the earlier Colorado findings [8].

Mobbs also criticises the Allen paper on leakage referred to by MacKay and Stone and finds it to be flawed. It is a non randomised study of 0.1% of the wells drilled in the USA so cannot be taken as a representative sample. [7] The companies concerned volunteered themselves for measurement and if they did that it is probably because the companies were reasonable confident that measurements for their installations would be low. It is also relevant to point out, as Mobbs does, that the publisher had to correct the Allen article after initial publication, because the authors had not declared conflicts of interest.

Mobbs continues

“On the other side of the equation, the figures Mackay and Stone used for gas production per well are too high. Currently there is a great deal of debate over how much gas and oil unconventional wells actually produce [9]. Recent studies suggest that resource estimates need to be downgraded, now that we have sufficient statistical data of what is actually being produced in the field [10]. There is no specific source for Mackay and Stone’s figures, but their modelling assumes levels of gas production which are roughly twice the value determined by the US Geological Survey [11] and the US Department of Energy [12].

“The easiest way to explain the flaw in Mackay and Stone’s reasoning is this: The method of calculation was correct. However, they took a figure for the emissions from gas production which may be half what it should be. This was divided by a figure for gas production which was twice as big as it should be. The result was that they produced an estimate for emissions which was one quarter of what it should have been.”

How much production, now and in the future?

It will be noticed here that Mobbs makes reference to a debate about how much oil and gas unconventional wells produce. This leads me to another aspect of Stephenson’s book that needs critical appraisal. A reader will not find any inkling of this debate in the pages of the book. Stephenson uncritically takes the viewpoint of the United States Energy Information Agency (EIA), including its projection of future production. He appears to be unaware that, for some time now, a number of authors have been warning that the shale boom in the USA is a bubble that would burst and that it would all end in tears. There has been what has been called a “battle of the forecasts” but Stephenson makes no mention of it.

Straight from pages one and two Stephenson is telling us that shale gas will provide half of US domestic production before long. Increasing volumes will be exported to Mexico and Canada. Not only that – manufacturing is returning to the USA because of cheap fuels and bulk chemicals and primary fuels in particular are booming. It is all a wonderful success….

…or, alternatively, the kind of hype that is typical of an economic bubble.

So what can we learn from academic studies based on peer review? Here’s what Mason Inman says in that Nature article already cited [8]:

“To provide rigorous and transparent forecasts of shale-gas production, a team of a dozen geoscientists, petroleum engineers and economists at the University of Texas at Austin has spent more than three years on a systematic set of studies of the major shale plays. The research was funded by a US$1.5-million grant from the Alfred P. Sloan Foundation in New York City, and has been appearing gradually in academic journals and conference presentations. That work is the “most authoritative” in this area so far…

If natural-gas prices were to follow the scenario that the EIA used in its 2014 annual report, the Texas team forecasts that production from the big four plays would peak in 2020, and decline from then on. By 2030, these plays would be producing only about half as much as in the EIA’s reference case. Even the agency’s most conservative scenarios seem to be higher than the Texas team’s forecasts…..”

Oh dear – there are the peer reviewed forecasts and there are the assertions of Professor Stephenson. Speaking for myself the academic studies that have been appearing in peer reviewed journals seem more thoroughly researched than the forecasts derived uncritically from the EIA. (5 peer reviewed articles are mentioned in the Nature article).

Bubble economics – in a gold rush, sell shovels

Mike Stephenson has written a book about shale gas but has omitted to mention, perhaps because he did not notice, that most of the US shale oil and gas industry has not actually made any money. In fact it has lost a lot of money. Sure it has produced a lot of oil and gas and that has (probably temporarily) arrested the decline of the oil and gas sector in the USA. Sure this has brought oil and gas prices down – and in the last year it produced a glut that has led to a price crash. Sure, it has been a veritable bonanza for oil and gas equipment and logistics companies like Halliburton, Schlumberger and Baker Hughes. As the saying goes, “in a gold rush – sell shovels”. However, the exploration and production companies have been losing money year after year.

In a study presented to a recent industry forum in Heuston and available on YouTube a consultant called Art Berman gives free cash flow figures for a sample of 40% of US exploration and production companies in this sector. He shows negative cash flow of $13.5 billion in 2013 going up to a negative of $14.26 billion (annualised from 3 quarters) in 2014. As a result debt in the sector has risen from nearly $165 billion in 2013 to $172.5 billion in 2014. [13]

Note that most of this is before the recent crash in oil and gas prices – a crash produced by a glut in the market. And where did this glut come from? The answer is not from Saudi Arabia or the other producers, but from the shale sector in the USA. If the sector could not produce a profit last year and in 2013 how is it going to now? A number of authors have been arguing for several years that the shale oil and gas boom was a bubble. Was Professor Stephenson unaware of their work?

The fact is, and this is another thing that Stephenson does not discuss – the shale boom in the USA did not occur in an economic vacuum. Ultra- low interest rates brought about by “quantitative easing” after the economic crash of 2007-2008 meant that banks and institutions in the finance sector were looking for somewhere to put their money that would actually make money. There was a “hunt for yield” and a lot of that money went into junk bonds and capital for shale exploration and production companies which were prepared to borrow money at high rates of interest. This was based on their assumption and expectation that, at some point in the future the rising prices of gas and oil would start paying big time for their expensive to finance exploration and production frenzy.

As in every bubble the confidence that it would pay off, if not now, but eventually, has kept the process going….and kept the merchants of hype turning out the “good news” that people like Stephenson have swallowed uncritically.

All of this matters – for it is key to the Stephenson argument that there is a balance of risk and reward and if the shale gas story is not going to last and is economically unsustainable anyway then the rewards will be small or non-existent for the production companies and for consumers. This is not to deny, of course, that some companies will have made a lot of money. As I have said these are the services companies like Halliburton, Schlumberger and Baker Hughes who have “sold the shovels” in this particular “gold rush”. Such subtleties are not to be found in this book and Stephenson writes about risks and rewards without ever reflecting on the fact that those who get the rewards and those who get the risks loaded onto them are different people.

Professor Stephenson as Goldilocks – looking for just the right amount of regulation

If the shale gas boom is not going to last and is unsustainable then there are problems with another part of the Stephenson book – the bit about regulation. On pages 125-126 he opines:

“This book is about risk and reward in shale gas. The reward is jobs and growth – maybe cheap energy. The risk is damage to the environment and human health. In countries where shale gas is being developed how is this balance between risk and reward being struck? The answer is mainly through regulation. Regulation can’t be too stringent such that it completely stifles the ability for a company or a driller to try different techniques – but at the same time it can’t be too lax, such that that it doesn’t completely protect the public and the environment”

It’s all rather like Goldilocks and the porridge that was too hot, the porridge that was too cold and the porridge that was of just the right temperature. But what is lacking in this banal idea of trade-offs is the possibility that there is no such “just right” balance – that the level of regulation that would effectively protect the public would be so costly that it would stifle the industry – whereas the level of regulation that would enable the industry to operate profitably would be so weak that it would be highly dangerous to public and the environment. What is also lacking in this banal presentation of the issues is the possibility that some of the processes are not amenable to regulation anyway. As a peer reviewed guest editorial in the British Medical Journal, which was critically examining a report by Public Health England, puts it [14]:

“…the report incorrectly assumes that many of the reported problems experienced in the US are the result of a poor regulatory environment. This position ignores many of the inherent risks of the industry that no amount of regulation can sufficiently remedy, such as well casing, cement failures and accidental spillage of waste water.”

So tell us this Professor Stephenson – how does one regulate for traffic accidents and accidental spills? You can re-route heavy goods vehicle traffic – but tell us how you can you re-route the exhaust emissions from the large numbers of heavy vehicles or the other equipment? Also, you can regulate but tell us how you can you guarantee that companies will keep to the regulations? We’ve already had experience in Nottinghamshire, where I live, of one drilling company breaching several planning conditions and it was local people who noticed, not the regulatory authorities because they only have one enforcement officer for ALL planning issues in the whole of Nottinghamshire.

If “no amount of regulation” can sufficiently remedy problems of the industry then the argument that risk and reward can be balanced through regulation is purely and simply wrong. Or if I am wrong then it is up to Professor Stephenson to prove it using peer reviewed evidence. In his book he cites a study of a varying amount of regulation in different US states – but that is not engaging with the core issue. Prove that regulation makes enough difference Professor!

In fact I think Professor Stephenson will find that peer reviewed literature is beginning to suggest the opposite of what he wants us to believe. There is evidence that tighter regulations do not have an impact. A recent study from Colorado shows that even with tighter regulations air pollution that is damaging to health has increased. This was because emissions per well improvements were overwhelmed by the increased number of wells. [15]

What this makes clear is that while Stephenson waves the flag for looking at the scientific evidence in peer research articles there are lots of points in this book where his opinions, for that is what they are, are not backed up by peer reviewed research at all.
The Shale Gas Factory and things “we” must put up and cope with
This is particularly the case in the chapter called “The Shale Gas Factory” where he has his work cut out as an apologist. He is honest enough to acknowledge that a fracked gas field is (in his words) “unpleasant” to live close to, most of all in the drilling phase. He mentions the industrialisation of the countryside, the high volumes of traffic, the enormous size of the trucks, the fragmentation of the countryside into parcels, the tremendous noise, the effect on local wildlife. But his argument that people will have to put up with all of this is not based on peer reviewed science – it is the pleading of a gas industry advocate, pure and simple. For example, he writes:

“But all of these are nuisances that are associated with other industries and oil and gas activities. I don’t mean to minimise them, but they are the sort of things that we can cope with. Trucks can be re-routed; noise can be put up with, land can be reclaimed just like it can after any industrial activity like quarrying.”

I especially liked the “I don’t mean to minimise them, but they are the sort of things we can cope with”. Who is this “we” exactly? His entire book is an exercise in minimising the dangers and unpleasantness.

Note here the assumption that if the problems associated with fracking are the same as problems of the oil and gas industry in general then somehow they don’t matter so much and “we” will just have to be put up with them. All over the world the oil and gas industry works hand in glove with military dictatorships and autocracies and is implicated in human rights abuses because it operates with the assumption that it can enter other people’s space, other environments and the people who live there will have to put up with it. All over the world people are expected to “put up” with damage to their living environment and expected to “cope”.

But people all over the world do not want to put up with the damage done by the oil and gas industry. Which is why, when people start to oppose them the oil and gas companies use their connections in government and the big money that they earn to bribe politicians, hire mercenaries and/or work with military dictators to buy off opposition or repress it violently. For example, when Ken Saro-Wiwa campaigned against environmental devastation caused by Shell and other oil companies in Nigeria he and 8 other leaders of the Ogoni tribe was hanged with the connivance of the oil and gas companies like Shell. Closer to home the Shell to Sea campaign in County Mayo in Ireland shows another community that rejected the assumption that it should just put up with the construction of a natural gas pipeline through its parish. In that case the community formed links with the Ogoni campaigners in Nigeria. [16][17]

The oil and gas sector has a culture of its own – it is used to working against opposition. As the film Gaslands II shows, when people in the US started to campaign against fracking they found themselves dealing with people with expertise in counter-insurgency.
Here’s some more to reassure the reader:

“Will these activities be dangerous? They might be. Trucks might spill chemicals, waste tanks might overflow in a stream. But these are industrial installations that engineers are good at managing and have been managing for a long time. In many ways there is no difference from building sites.”

More nuisances that the Professor “does not mean to minimise”

Once again the professor “does not minimise” the dangers. But don’t worry. We are dealing with engineers. They wear hard hats so they must know what they are doing……

But have you got a peer reviewed article to back that up Professor Stephenson? Because here’s some information from a peer reviewed journal called the American Journal of Industrial Medicine from July of last year which actually compares oil and gas field fatalities to that on building sites. The research was into health and safety needs associated with drilling and fracking and was by researchers from the Colorado School of Public Health and the College of Health Sciences at the University of Wyoming. What they found was high injury and mortality rates among gas and oilfield workers. The occupational fatality rate was 2.5 times higher than the construction industry and seven times higher than that for general industry.[18]

Curiously, while the fatality rate was higher than on building sites the injury rates were lower than those of the construction industry. This suggests that injuries were under reported. Again I do not know the reasons for this but I speculate that it is because it is not so easy to hide a death but I suppose, as Professor Stephenson might say, people in the industry have learned to cope and put up with mere injury. Other problems that the researchers found that the workers coped and put up with were crystalline silica levels above occupational health standards as well as particulate matter, benzene, the noise and radiation.

The point I would wish to make at this point is that corresponding to the things that Mike Stephenson thinks “we” have to put up with there are statistics of accident rates, hospital admission rates, deaths. It is possible to see evidence of trends affecting professions working in fields like industrial medicine, health and safety and public health which eventually leads to informal studies and then to peer revewed studies.

After 2006 when the Shale boom hit the Bakken region in the USA, the Mercy Medical Centre in Williston and the Tioga Medical Centre in neighbouring Williams County saw their ambulance runs increase by more than 200 per cent. Tioga’s hospital saw a staggering leap in trauma patients by 1,125 percent. Mercy had a 173% percent increase.” Drugs (including overdoses of prescription drugs, methamphetamines, and heroin) explain many of the cases, with oilfield related injuries such as “finger crushed or cut off, extremity injuries, burns and pressure burns” accounting for 50% of the cases in one of the region’s hospital emergency rooms. [19]

Why is this such a dangerous and brutalised industry?

Now if you are a Professor Stephenson this is something to be put up with but other people might ask how it comes about that alcoholism, drug addiction, sexually transmitted diseases, violence and accidents suddenly shoot up when the oil and gas industry comes to town?

Might it be that the industry has a largely mobile workforce that arrives and has no attachment and hence no loyalty to the people and the areas that it moves through? Might it be that the workforce puts up with the noise, the fumes, the accidents and so becomes brutalised and indifferent to the people who live in the places that they rip apart and then move away from? Might also be that a highly mobile and partly international workforce who are dislocated like this, permanently transient, are desensitized emotionally and that that is what makes them turn to drugs and alcohol? It might be that this is an industry whose culture desensitises them and then they expect local people to put up with the destruction of the places that they move through? (These are my hypotheses for peer reviewed research with a workforce with undeniably high rates of drug, alcohol and violence problems).

On the other side of this process the people who have to put up with the industry, feel disempowered by the likes of Professor Stephenson, the politicians and his friends. They become understandably stressed and anxious and their mental health suffers – particularly when it is expected that these “are the sort of things that we can cope with”. Speak for yourself Professor.[20]

Some would say “home is where the heart is” but, for Stephenson, a loyal advocate for the industry that always just moving through on route to the next oil and gas field, an industry from which so much money for the BGS comes, it’s all a matter of personal preferences.

Here he is, “not minimising” again:

“As for industrialisation of the landscape and the shale gas factor, there’s no doubt that for a period of time that could last for as much as a year there will be intense industrial activity. After this, during production, activity is less intense and obtrusive and after abandonment there is no activity. Whether you think that the landscape is scarred and tainted with industry at this stage depends on your point of view. It’s true that access roads will still divide up the land after the wells are plugged and clearings in the woods will still be visible for a long time after. Some will say that’s what our landscape looks like already – a particular pattern of past uses of the land. Others will say it’s unacceptable” ( p108)

Well we know what Stephenson would say….unless perhaps if it was about where he lives, I don’t know. What I do know is that this has nothing to do with peer reviewed science. What I also know is if this sort of thing happens it leaves measurable scars on the people and the places that live there and this turns up eventually in statistics and then in peer reviewed articles about health.

As the Concerned Health Professionals of New York state “ public health problems associated with drilling and fracking are becoming increasingly apparent. Documented indicators variously include increased rates of hospitalisation, ambulance calls, emergency room visits, self reported respiratory and skin problems, motor vehicle fatalities, trauma, drug abuse, infant mortality, congenital heart defects and low birth weights”. ([21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] )

Note the infant mortality rates. Young children are being killed by this industry.

The case for the precautionary principle – criteria for where ‘enough is enough’

But let’s continue. If you are going to use peer reviewed articles to reveal what the issues are then it assumes that the industry will be able to go ahead anyway because you can only learn about the issues in real life by looking at the retrospective record. This indeed is the assumption of Stephenson’s book. You will not find in it any criteria for deciding that the health or environmental damage has exceeded some threshold level where Professor Stephenson thinks the government should cry “enough – this industry must be closed down as too dangerous to public health and/or too dangerous to local environments and/or too dangerous to the climate system.” Why Professor?

Of course there is a paradox in all of this – you can only gather evidence of whether something is safe or not, or can be made to be safe or not, through the actual doing. We can only say something like this in retrospect. You can only test your explanations and predictions about fracking by doing fracking – and if the doing of fracking shows the explanations and predictions that the risks are low to be wrong then it advances your science all right but, in the meantime, environments may have been damaged, you may have hurt a lot of people and you may have set off runaway climate change. Great for the science – but too late if you have created an industry, invested a lot of capital in it, built the gas fired power stations to burn the gas….and triggered a runaway process.

That, of course, is the case for the precautionary principle. While I read this book I looked out for mention of the precautionary principle and, towards the end looked in the index to check I had not missed it somewhere. It’s not in this book. Why not? Of course the precautionary principle is a damage avoidance strategy to be used to prevent things happening that might be very dangerous before the full evidence is in. It is supposed to be embodied in EU policy but in practice the powers that be and industrial interests never think in these terms because it restricts their freedom of action. Their attitude is – so what if there are risks if the industry and government can make other people and places carry these risks? Those are the sort of things that “we” – in other words those unlucky enough to be living in a gas field “can cope with”.

Of course in this case we in the UK are lucky because we have the experience right across the USA to help us decide whether to ban fracking or not. All the evidence is still not in – but we have a fair amount to go on. In this respect books like those of Mike Stephenson, which are powerfully misleading to the public and politicians can do a lot of damage. It is true that at £70 a copy not many people will read it but it will help to cover the backs of the decision makers and gives the appearance that they are following the evidence of their scientific advisers. No doubt it will also help the BGS show loyalty to its friends in the oil and gas industry. This will help to keep pulling in the money and contracts which pay for such a very large percentage of what the BGS does. It will keep the government sweet too.

Conclusion – the central idea of this book is banal and naive

In conclusion, the central theme of this book – that “science can be allowed to decide through peer reviewed debate” is at best innocent in the naive sense, pious and misleading. It evokes a world where issues are decided on by politicians and the public guided by neutral scientists who deliver the facts. But this fairy tale for the children begs all the difficult questions.

Firstly it takes time for the facts to emerge and, in the meantime there is uncertainty about how dangerous the industry is or is not. To find out what the situation is you have to let the industry proceed in at least one or more places but what you might find is that it does a lot of damage. So you find out when the damage has already been done – when, for those places it is too late.

Secondly what you are likely to find out if and when there is damage done is that a lot of resources get put into a cover up and massaging the truth. The clash of ideas is inevitably “polluted” by public relations strategies used particularly by the most powerful actors to influence which interpretations are presented and which get noticed in public debate.

Thirdly, the way issues are framed makes a huge amount of difference and it is possible to choose some issues and some papers about them and ignore or dismiss others in a way that is incredibly misleading.

Fourthly generous resources are available to present and research some avenues of inquiry while not being available at all to investigate others. The idea that there is ‘no evidence’ for a problem can be presented as proof that the problem does not exist whereas it may be proof that no resources have been made available to look.

Fifthly, narratives of risk and reward can ignore the way that some people might be rewarded while everyone else, including future generations, can lose badly. This can lead to a further paradox – the winners in public policy debates may be the people with the greater resources. But their greater resources may be because they are the beneficiaries of a process that others suffer from, and are impoverished by. There is then an asymmetry in the resources different groups bring to the public policy debate as well as an asymmetry in access to the “corridors of power” and the detailed policy making process.

In the end this leads to a situation in which the people who write the policy are the people who benefit from the policy – this includes the frackademics of course who get lots of money and are feted with lots of attention by high ranking politicians. Then places like the British Geological Survey keep raking in the money and the research grants – though quite why a geological institution should be a lead agency to research multi-dimensional issues of public health and environmental damage is itself debatable. Sure they have a role – but as a lead agency? Might it be because they are already closely tied into “collegiate” relations with the oil and gas industry so can be trusted by a government and officialdom that has also been co-opted by the industry? As Stephenson puts it:

“…if its properly funded, if the scientists are listened to and if their results are out for all to see then the public debate is better and policy and regulation are better…” (p145)

Yes, he would say that wouldn’t he?

Note

Most, though not all, of the literature referred to in this review are taken from the compilation of the concerned health professionals of New York which is downloadable at www.concernedhealthny.org

You can see Paul Mobbs’ scalable diagram of the political, academic, PR and industry connection which Stephenson is in at http://www.fraw.org.uk/mei/archive/fracktured_accountability/frackogram_2015.svg.

(1) S”hale gas and public health – the whitewash exposed.” The Ecologist Mobbs P. (2014) http://www.theecologist.org/News/news_analysis/2385900/shale_gas_and_public_health_the_whitewash_exposed.html

(2) http://cmi.princeton.edu/wedges/intro.php

(3) http://kevinanderson.info/blog/why-a-uk-shale-gas-industry-is-incompatible-with-the-2c-framing-of-dangerous-climate-change/

(4) http://www.pnas.org/content/110/50/20018.full

(5) GEOPHYSICAL RESEARCH LETTERS, VOL. 40, 4393–4397, doi:10.1002/grl.50811, 2013

(6) “Remote sensing of fugitive methane emissions from oil and gas production in North American tight geologic formations” Oliver Schneising, John P. Burrows, Russell R. Dickerson, Michael Buchwitz, Maximilian Reuter and Heinrich Bovensmann, in “Earth’s Future 2 (10) 548-558) Article first published online: 6 OCT 2014 DOI: 10.1002/2014EF000265 http://onlinelibrary.wiley.com/doi/10.1002/2014EF000265/abstract;jsessionid=EA0823B336056464D344E41EE226992A.f01t04

(7) http://www.fraw.org.uk/files/extreme/decc_2013-2.pdf ; http://www.theecologist.org/News/news_analysis/2417288/fracking_as_bad_for_climate_as_coal_uks_dodgy_dossier_exposed.html ;
http://www.fraw.org.uk/files/extreme/allen_2013.pdf

(8) ‘Methane leaks erode green credentials of natural gas’ by Jeff Tollefson at http://www.nature.com/news/methane-leaks-erode-green-credentials-of-natural-gas-1.12123#/b3

[9]    “A reality check on the shale revolution”, David Hughes, Nature, 21st February 2013 – http://fraw/files/extreme/hughes_2013.pdf

[10]    “Natural gas: The fracking fallacy”, Mason Inman, Nature, 3rd December 2014 – http://www.nature.com/news/natural-gas-the-fracking-fallacy-1.16430

[11]    “Variability of Distributions of Well-Scale Estimated Ultimate Recovery for Continuous (Unconventional) Oil and Gas Resources in the United States”, Open-File Report 2012-1118, U.S. Geological Survey, U.S. Department of the Interior, June 2012 – http://www.fraw.org.uk/files/extreme/usgs_eur_2012.pdf

[12]    “Updated Fugitive Greenhouse Gas Emissions for Natural Gas Pathways in the GREET Model”, A. Burnham et al., Energy Systems Division, Argonne National Laboratory, October 2013 – https://greet.es.anl.gov/files/ch4-updates-13

(13) “Years not decades. Proven Reserves and the Shale Revolution. The Apparent End of the Beautiful Story” http://www.artberman.com/wp-content/uploads/HGS-NA-Presentation-23-Feb-2015.pdf

(14) Editorial: “Mistaking Best Practices for Actual Practices. Public Health Englands Draft Report on Shale Gas Extraction”, British Medical Journal, 17th April 2014 http://www.bmj.com/content/348/bmj.g2728

(15) “Influence of Oil and Gas Emissions on Ambient Atmospheric Non Methane Hydrocarbons in Residential Areas of Northeastern Colorado”,Thompson et al 2014. Ementa: Science of the Anthropocene 2, 000035

(16) http://www.theguardian.com/world/2009/jun/08/nigeria-usa

(17) https://en.wikipedia.org/wiki/Shell_to_Sea

(18) “Occupational exposures in the oil and gas extraction industry: State of the science and research recommendations.”, Witter, R.Z., Tenney, L., Clark, S., and Newman, L.S. (2014). American Journal of Industrial Medicine, 57(7), 847-856. http://onlinelibrary.wiley.com/doi/10.1002/ajim.22316/full

(19) http://www.bakkentoday.com/event/article/id/37101

(20) “Potential health impacts of the proposed shale gas exploration sites in Lancashire.” Karunanithi, S. (2014, November 6). Reported at a meeting of the Lancashire County Council Cabinet, Thursday, 6th November, 2014 at 2.00 pm in Cabinet Room ‘B’ – County Hall, Preston, Item 9 on the agenda(1-68). Retrieved from http://council.lancashire.gov.uk/documents/b11435/Potential%20Health%20Impacts%20of%20the%20Proposed%20Shale%20Gas%20Exploration%20Sites%20in%20Lancashire%2006th-Nov-2014%2014.pdf?T=9

(21) Compendium at www.concernedhealthny.org

(22) “Study: More gas wells in area leads to more hospitalizations.” The Citizen’s Voice. Skrapits, E. (2014, October 2). Retrieved from http://citizensvoice.com/news/study-more-gas-wells-in-area-leads-to-more-hospitalizations-1.1763826

(23) “Fatal truck accidents have spiked during Texas’ ongoing fracking and drilling boom.” Houston Chronicle. Olsen,L. (2014, 11 September). Retrieved from (24)
http://www.houstonchronicle.com/news/article/Fracking-and-hydraulic-drilling-have-brought-a-5747432.php?cmpid=email-premium&cmpid=email-premium&t=1a9ca10d49c3f0c8a9#/0

(25) “Proximity to natural gas wells and reported health status: Results of a household survey in Washington County, Pennsylvania.” Rabinowitz, P.M., Slizovskiy, I.B., Lamers, V., Trufan, S.J., Holford, T.R., Dziura, J.D., Peduzzi, P.N., Kane, M.J., Reif, J.S., Weiss, T.R. and Stowe, M.H. (2014). Environmental Health Perspectives. Advance online publication. http://dx.doi.org/10.1289/ehp.1307732

(26) “Drugs, oilfield work, traffic pushing more people through doors of Watford City ER.” Bakken Today. Bryan, K.J. (2014, August 3). Retrieved from http://www.bakkentoday.com/event/article/id/37101/
(27) S Schlanger, Z. (2014, May 21). In Utah boom town, a spike in infant deaths raises questions. Newsweek. Retrieved June 10, 2014, from http://www.newsweek.com/2014/05/30/utah-boom-town-spike-infant-deaths-raises-questions-251605.html
(28) American Lung Association state of the air 2013. Retrieved June 10, 2014, from http://www.stateoftheair.org/2013/states/utah/uintah-49047.html .
(29) “Birth outcomes and maternal residential proximity to natural gas development in rural Colorado.” McKenzie, L. M., Guo, R., Witter, R. Z., Savitz, D. A., Newman, L. S., & Adgate, J. L. (2014). Environmental Health Perspectives, 122, 412-417. doi: 10.1289/ehp.1306722
(30) “Study shows fracking is bad for babies”. Whitehouse, M. (2014, January 4). Bloomberg. Retrieved June 10, 2014, from http://www.bloombergview.com/articles/2014-01-04/study-shows-fracking-is-bad-for-babies
(31) “The impact of oil and gas extraction on infant health in Colorado.” Hill, E. L. (2013, October). Retrieved June 10, 2014, from http://www.elainelhill.com/research
(32) “Shale gas development and infant health: Evidence from Pennsylvania (under review).” Hill, E.L. (2013, December). Retrieved June 23, 2014 from http://www.elainelhill.com/research.
(33) “Fracking’s real health risk may be from air pollution.” Abrams, L. (2013, August 26). Salon. Retrieved June 10, 2014, from http://www.salon.com/2013/08/26/frackings_real_health_risk_may_be_from_air_pollution/
(34) “Statement on preliminary findings from the Southwest Pennsylvania Environmental Health Project study” [Press release]. Dyrszka, L., Nolan, K., & Steingraber, S. (2013, August 27). Concerned Health Professionals of NY. Retrieved June 10, 2014, from http://concernedhealthny.org/statement-on-preliminary-findings-from-the-southwest-pennsylvania-environmental-health-project-study/
(35) “Investigating links between shale gas development and health impacts through a community survey project in Pennsylvania.” Steinzor, N., Subra, W., & Sumi, L. (2013). NEW SOLUTIONS: A Journal of Environmental and Occupational Health Policy, 23(1), 55-83. doi: 10.2190/NS.23.1.e
(36) Poll shows support for a drilling moratorium in Pennsylvania. StateImpact. Phillips, S. (2013, May 14). Retrieved June 10, 2014, from http://stateimpact.npr.org/pennsylvania/2013/05/14/poll-shows-support-for-a-drilling-moratorium-in-pennsylvania/

Peculiarities of Russian National Character

From the keyboard of Dmitry Orlov
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Ancient Slavic god Zimnik: a squat old man, long hair the color of snow, wears a white coat, always barefoot. Carries an iron staff, one swing with which instantly freezes everything solid. Can summon snowstorms, ice storms and blizzards. Goes around taking whatever he likes, especially children who misbehave.

Ancient Slavic god Zimnik: a squat old man, long hair the color of snow, wears a white coat, always barefoot. Carries an iron staff, one swing with which instantly freezes everything solid. Can summon snowstorms, ice storms and blizzards. Goes around taking whatever he likes, especially children who misbehave.

Originally published at Club Orlov on January 13, 2015

Recent events, such as the overthrow of the government in Ukraine, the secession of Crimea and its decision to join the Russian Federation, the subsequent military campaign against civilians in Eastern Ukraine, western sanctions against Russia, and, most recently, the attack on the ruble, have caused a certain phase transition to occur within Russian society, which, I believe, is very poorly, if at all, understood in the west. This lack of understanding puts Europe at a significant disadvantage in being able to negotiate an end to this crisis.

Whereas prior to these events the Russians were rather content to consider themselves “just another European country,” they have now remembered that they are a distinct civilization, with different civilizational roots (Byzantium rather than Rome)—one that has been subject to concerted western efforts to destroy it once or twice a century, be it by Sweden, Poland, France, Germany, or some combination of the above. This has conditioned the Russian character in a specific set of ways which, if not adequately understood, is likely to lead to disaster for Europe and the world.

Lest you think that Byzantium is some minor cultural influence on Russia, it is, in fact, rather key. Byzantine cultural influences, which came along with Orthodox Christianity, first through Crimea (the birthplace of Christianity in Russia), then through the Russian capital Kiev (the same Kiev that is now the capital of Ukraine), allowed Russia to leapfrog across a millennium or so of cultural development. Such influences include the opaque and ponderously bureaucratic nature of Russian governance, which the westerners, who love transparency (if only in others) find so unnerving, along with many other things. Russians sometimes like to call Moscow the Third Rome—third after Rome itself and Constantinople—and this is not an entirely empty claim. But this is not to say that Russian civilization is derivative; yes, it has managed to absorb the entire classical heritage, viewed through a distinctly eastern lens, but its vast northern environment has transformed that heritage into something radically different.

Since this subject is of overwhelming complexity, I will focus on just four factors, which I find essential for understanding the transformation we are currently witnessing.

1. Taking offense

Western nations have emerged in an environment of limited resources and relentless population pressure, and this has to a large degree determined the way in which they respond when they are offended. For quite a long time, while centralized authority was weak, conflicts were settled through bloody conflict, and even a minor affront could cause former friends to become instant adversaries and draw their swords. This is because it was an environment in which standing your ground was key to survival.

In contrast, Russia emerged as a nation in an environment of almost infinite, although mostly quite diffuse, resources. It also drew from the bounty of the trade route that led from the Vikings to the Greeks, which was so active that Arab geographers believed that there was a salt-water strait linking the Black Sea with the Baltic, whereas the route consisted of rivers with a considerable amount of portage. In this environment, it was important to avoid conflict, and people who would draw their swords at a single misspoken word were unlikely to do well in it.

Thus, a very different conflict resolution strategy has emerged, which survives to this day. If you insult, aggrieve or otherwise harm a Russian, you are unlikely to get a fight (unless it happens to be a demonstrative beating held in a public setting, or a calculated settling of scores through violence). Instead, more likely than not, the Russian will simply tell you to go to hell, and then refuse to have anything further to do with you. If physical proximity makes this difficult, the Russian will consider relocating, moving in any direction that happens to be away from you. So common is this speech act in practice that it has been abbreviated to a monosyllabic utterance: “Пшёл!” (“Pshol!”) and can be referred to simply as “послать” (literally, “to send”). In an environment where there is an almost infinite amount of free land to settle, such a strategy makes perfect sense. Russians live like settled people, but when they have to move, they move like nomads, whose main method of conflict resolution is voluntary relocation.

This response to grievance as something permanent is a major facet of the Russian culture, and westerners who do not understand it are unlikely to achieve an outcome they would like, or even understand. To a westerner, an insult can be resolved by saying something like “I am sorry!” To a Russian that’s pretty much just noise, especially if it is being emitted by somebody who has already been told to go to hell. A verbal apology that is not backed up by something tangible is one of these rules of politeness, which to the Russians are something of a luxury. Until a couple of decades ago, the standard Russian apology was “извиняюсь” (“izviniáius’”), which can be translated literally as “I excuse myself.” Russia is now a much more polite country, but the basic cultural pattern remains in place.

Although purely verbal apologies are worthless, restitution is not. Setting things right may involve parting with a prized possession, or making a significant new pledge, or announcing an important change of direction. The point is, these all involve taking pivotal actions, not just words, because beyond a certain point words can only make the situation worse, taking it from the “Go to hell” stage to the even less copacetic “Let me show you the way” stage.

2. Dealing with invaders

Russia has a long history of being invaded from every direction, but especially from the west, and Russian culture has evolved a certain mindset which is difficult for outsiders to comprehend. First of all, it is important to realize that when Russians fight off an invasion (and having the CIA and the US State Department run Ukraine with the help of Ukrainian Nazis qualifies as an invasion) they are not fighting for territory, at least not directly. Rather, they are fighting for Russia as a concept. And the concept states that Russia has been invaded numerous times, but never successfully. In the Russian mindset, invading Russia successfully involves killing just about every Russian, and, as they are fond of saying, “They can’t kill us all.” (“Нас всех не убьёшь.”) Population can be restored over time (it was down 22 million at the end of World War II) but the concept, once lost, would be lost forever. It may sound nonsensical to a westerner to hear Russians call their country “a country of princes, poets and saints,” but that’s what it is—it is a state of mind. Russia doesn’t have a history—it is its history.

Because the Russians fight for the concept of Russia rather than for any given chunk of Russian territory, they are always rather willing to retreat—at first. When Napoleon invaded Russia, fully planning to plunder his way across the countryside, he found the entire countryside torched by the retreating Russians. When he finally occupied Moscow, it too went up in flames. Napoleon camped out for a bit, but eventually, realizing that there was nothing more to be done (attack Siberia?) and that his army would starve and die of exposure if they remained, he beat a hasty and shameful retreat, eventually abandoning his men to their fate. As they retreated, another facet of Russian cultural heritage came to the fore: every peasant from every village that got torched as the Russians retreated was in the forefront as the Russians advanced, itching for a chance to take a pot shot at a French soldier.

Similarly, the German invasion during World War II was at first able to make rapid advances, taking a lot of territory, while the Russians equally swiftly retreated and evacuated their populations, relocating entire factories and other institutions to Siberia and resettling families in the interior of the country. Then the German advance stopped, reversed, and eventually turned into a rout. The standard pattern repeated itself, with the Russian army breaking the invader’s will while most of the locals that found themselves under occupation withheld cooperation, organized as partisans and inflicted maximum possible damage on the retreating invader.

Murmansk, 68°58′45″, pop. 300,000. January 12: first sunrise in 40 days. Length of day: 38 minutes


3. Dealing with foreign powers
Another Russian adaptation for dealing with invaders is to rely on the Russian climate to do the job. A standard way of ridding a Russian village house of vermin is simply to not heat it; a few days at 40 below or better and the cockroaches, bedbugs, lice, nits, weevils, mice, rats are all dead. It works with invaders too. Russia is the world’s most northern country. Canada is far north, but most of its population is spread along its southern border, and it has no major cities above the Arctic Circle, while Russia has two. Life in Russia in some ways resembles life in outer space or on the open ocean: impossible without life support. The Russian winter is simply not survivable without cooperation from the locals, and so all they have to do to wipe out an invader is withhold cooperation. And if you think that an invader can secure cooperation by shooting a few locals to scare the rest, see above under “Taking offense.”

Russia owns almost the entire northern portion of the Eurasian continent, which comprises something like 1/6 of the Earth’s dry surface. That, by Earth standards, is a lot of territory. This is not an aberration or an accident of history: throughout their history, the Russians were absolutely driven to provide for their collective security by gaining as much territory as possible. If you are wondering what motivated them to undertake such a quest, see “Dealing with invaders” above.

If you think that foreign powers repeatedly attempted to invade and conquer Russia in order to gain access to its vast natural resources, then you are wrong: the access was always there for the asking. The Russians are not exactly known for refusing to sell their natural resources—even to their potential enemies. No, what Russia’s enemies wanted was to be able to tap into Russia’s resources free of charge. To them, Russia’s existence was an inconvenience, which they attempted to eliminate through violence.

What they achieved instead was a higher price for themselves, once their invasion attempt failed. The calculus is simple: the foreigners want Russia’s resources; to defend them, Russia needs a strong, centralized state with a big, powerful military; ergo, the foreigners should be made to pay, to support Russia’s state and military. Consequently, most of the Russian state’s financial needs are addressed through export tariffs, on oil and natural gas especially, rather than by taxing the Russian population. After all, the Russian population is taxed heavily enough by having to fight off periodic invasions; why tax them more? Thus, the Russian state is a customs state: it uses customs duties and tariffs to extract funds from the enemies who would destroy it and use these funds to defend itself. Since there is no replacement for Russia’s natural resources, the more hostile the outside world acts toward Russia, the more it will end up paying for Russia’s national defense.

Note that this policy is directed at foreign powers, not at foreign-born people. Over the centuries, Russia has absorbed numerous immigrants: from Germany during the 30 years’ war; from France after the French revolution. More recent influxes have been from Vietnam, Korea, China and Central Asia. Last year Russia absorbed more immigrants than any other country except for the United States, which is dealing with an influx from countries on its southern border, whose populations its policies have done much to impoverish. Moreover, the Russians are absorbing this major influx, which includes close to a million from war-torn Ukraine, without much complaint. Russia is a nation of immigrants to a greater extent than most others, and is more of a melting pot than the United States.

4. Thanks, but we have our own

One more interesting Russian cultural trait is that Russians have always felt compelled to excel in all categories, from ballet and figure-skating to hockey and football to space flight and microchip manufacturing. You may think of champagne as a trademark French product, but last I checked “Советское шампанское” (“Soviet champagne”) was still selling briskly around New Year’s Eve, and not only in Russia but in Russian shops in the US because, you see, the French stuff may be nice, but it just doesn’t taste sufficiently Russian. For just about every thing you can imagine there is a Russian version of it, which the Russians often feel is better, and sometimes can claim they invented in the first place (the radio, for instance, was invented by Popov, not by Marconi). There are exceptions (tropical fruit is one example) and they are allowed provided they come from a “brotherly nation” such as Cuba. That was the pattern during the Soviet times, and it appears to be coming back to some extent now.

During the late Brezhnev/Andropov/Gorbachev “stagnation” period Russian innovation indeed stagnated, along with everything else, and Russia lost ground against the west technologically (but not culturally). After the Soviet collapse Russians became eager for western imports, and this was quite normal considering that Russia wasn’t producing much of anything at the time. Then, during the 1990s, there came the era of western compradors, who dumped imported products on Russia with the long-term goal of completely wiping out domestic industry and making Russia into a pure raw materials supplier, at which point it would be defenseless against an embargo and easily forced to surrender its sovereignty. This would be an invasion by non-military means, against which Russia would find itself defenseless.

This process ran quite far before it hit a couple of major snags. First, Russian manufacturing and non-hydrocarbon exports rebounded, doubling several times in the course of a decade. The surge included grain exports, weapons, and high-tech. Second, Russia found lots of better, cheaper, friendlier trading partners around the world. Still, Russia’s trade with the west, and with the EU specifically, is by no means insignificant. Third, the Russian defense industry has been able to maintain its standards, and its independence from imports. (This can hardly be said about the defense firms in the west, which depend on Russian titanium exports.)

And now there has come the perfect storm for the compradors: the ruble has partially devalued in response to lower oil prices, pricing out imports and helping domestic producers; sanctions have undermined Russia’s confidence in the reliability of the west as suppliers; and the conflict over Crimea has boosted the Russians’ confidence in their own abilities. The Russian government is seizing this opportunity to champion companies that can quickly effect import replacement for imports from the west. Russia’s central bank has been charged with financing them at interest rates that make import replacement even more attractive.

Some people have been drawing comparisons between the period we are in now and the last time oil prices dropped—all the way to $10/barrel—in some measure precipitating the Soviet collapse. But this analogy is false. At the time, the Soviet Union was economically stagnant and dependent on western credit to secure grain imports, without which it wouldn’t have been able to raise enough livestock to feed its population. It was led by the feckless and malleable Gorbachev—an appeaser, a capitulator, and a world-class windbag whose wife loved to go shopping in London. The Russian people despised him and referred to him as “Mishka the Marked,” thanks to his birthmark. And now Russia is resurgent, is one of the world’s largest grain exporters, and is being led by the defiant and implacable President Putin who enjoys an approval rating of over 80%. In comparing pre-collapse USSR to Russia today, commentators and analysts showcase their ignorance.

Conclusions

This part almost writes itself. It’s a recipe for disaster, so I’ll write it out as a recipe.

1. Take a nation of people who respond to offense by damning you to hell, and refusing to having anything more to do with you, rather than fighting. Make sure that this is a nation whose natural resources are essential for keeping your lights on and your houses heated, for making your passenger airliners and your jet fighters, and for a great many other things. Keep in mind, a quarter of the light bulbs in the US light up thanks to Russian nuclear fuel, whereas a cut-off of Russian gas to Europe would be a cataclysm of the first order.

2. Make them feel that they are being invaded by installing a government that is hostile to them in a territory that they consider part of their historical homeland. The only truly non-Russian part of the Ukraine is Galicia, which parted company many centuries ago and which, most Russians will tell you, “You can take to hell with you.” If you like your neo-Nazis, you can keep your neo-Nazis. Also keep in mind how the Russians deal with invaders: they freeze them out.

3. Impose economic and financial sanctions on Russia. Watch in dismay as your exporters start losing money when in instant retaliation Russia blocks your agricultural exports. Keep in mind that this is a country that, thanks to surviving a long string of invasion attempts, traditionally relies on potentially hostile foreign states to finance its defense against them. If they fail to do so, then it will resort to other ways of deterring them, such as freezing them out. “No gas for NATO members” seems like a catchy slogan. Hope and pray that it doesn’t catch on in Moscow.

4. Mount an attack on their national currency, causing it to lose part of its value on par with a lower price of oil. Watch in dismay as Russian officials laugh all the way to the central bank because the lower ruble has caused state revenues to remain unchanged in spite of lower oil prices, erasing a potential budget deficit. Watch in dismay as your exporters go bankrupt because their exports are priced out of the Russian market. Keep in mind, Russia has no national debt to speak of, runs a negligible budget deficit, has plentiful foreign currency reserves and ample gold reserves. Also keep in mind that your banks have loaned hundreds of billions of dollars to Russian businesses (which you have just deprived of access to your banking system by imposing sanctions). Hope and pray that Russia doesn’t put a freeze on debt repayments to western banks until the sanctions are lifted, since that would blow up your banks.

5. Watch in dismay as Russia signs major natural gas export deals with everyone except you. Is there going to be enough gas left for you when they are done? Well, it appears that this no longer a concern for the Russians, because you have offended them, and, being who they are, they told you to go to hell (don’t forget to take Galicia with you) and will now deal with other, friendlier countries.

6. Continue to watch in dismay as Russia actively looks for ways to sever most of the trade links with you, finding suppliers in other parts of the world or organizing production for import replacement.

But now comes a surprise—an underreported one, to say the least. Russia has just offered the EU a deal. If the EU refuses to join the Transatlantic Trade and Investment Partnership with the US (which, by the way, would hurt it economically) then it can join the Customs Union with Russia. Why freeze yourselves out when we can all freeze out Washington instead? This is the restitution Russia would accept for the EU’s offensive behavior with regard to the Ukraine and the sanctions. Coming from a customs state, it is a most generous offer. A lot went into making it: the recognition that the EU poses no military threat to Russia and not much of an economic one either; the fact that the European countries are all very cute and tiny and lovable, and make tasty cheeses and sausages; the understanding that their current crop of national politicians is feckless and beholden to Washington, and that they need a big push in order to understand where their nations’ true interests lie… Will the EU accept this offer, or will they accept Galicia as a new member and “freeze out”?

 

 

Dmitry Orlov is a Russian-American engineer and a writer on subjects related to “potential economic, ecological and political decline and collapse in the United States,” something he has called “permanent crisis”. He  has written The Five Stages of Collapse and Reinventing Collapse, continues to write regularly on his “Club Orlov” blog and at EnergyBulletin.Net.

Russia, Turkey pivot across Eurasia

Off the keyboard of Pepe Escobar
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THE ROVING EYE

Putin-chess

Originally published in Asia Times on December 8, 2014
Discuss this article here in the Diner Forum.

 

The latest, spectacular “Exit South Stream, Enter Turk Stream” Pipelinistan gambit will be sending big geopolitical shockwaves all across Eurasia for quite some time. This is what the New Great Game in Eurasia is all about.

In a nutshell, a few years ago Russia devised North Stream – fully operational – and South Stream – still a project – to bypass unreliable Ukraine as a gas transit nation. Now Russia devises a new sweet deal with Turkey to bypass the “non-constructive” (Putin’s words) approach of the European Commission (EC) concerning the European “Third Energy Package”, which prohibits one company from controlling the full cycle of extraction, transportation and sale of energy resources.

Background is essential to understand the current game. Already five years ago I was following in detail Pipelineistan’s ultimateopera – the war between rival pipelines South Stream and Nabucco. Nabucco eventually became road kill. South Stream may eventually be resurrected, but only if the EC comes to its senses (don’t bet on it.)

The 3,600 kilometer South Stream should be in place by 2016, branching out to Austria and the Balkans/Italy. Gazprom owns it with a 50% stake – along with Italy’s ENI (20%), French EDF (15%) and German Wintershall, a subsidiary of BASF (15%). As it stands, these European energy majors are not exactly beaming – to say the least. For months, Gazprom and the EC were haggling about a solution, but in the end Brussels predictably succumbed to its own mediocrity – and relentless US pressure over weak-link and European Union member Bulgaria.

Russia still gets to build a pipeline under the Black Sea, but one now redirected to Turkey and, crucially, pumping the same amount of gas South Stream would. Not to mention Russia gets to build a new LNG (liquefied natural gas) central hub in the Mediterranean. Thus Gazprom has not spent US$5 billion in vain (finance, engineering costs). The redirection makes total business sense. Turkey is Gazprom’s second-biggest customer after Germany; much bigger than Bulgaria, Hungary and Austria combined.

Russia also advances a unified gas distribution network capable of delivering natural gas from anywhere in Russia to any hub alongside Russia’s borders.

And as if it was needed, Russia gets yet another graphic proof that its real growth market in the future is Asia, especially China – not a fearful, stagnated, austerity-devastated, politically paralyzed EU. The evolving Russia-China strategic partnership implies Russia as complementary to China, excelling in major infrastructure projects from building of dams to laying out pipelines. This is trans-Eurasia business with a sharp geopolitical reach and not subjected to ideology-drenched politics.

Russian “defeat”? Really?
Turkey also made a killing. It’s not only the deal with Gazprom; Moscow will build no less than Turkey’s entire nuclear industry, and there will be increased soft power interaction (more trade and tourism). Most of all, Turkey is now increasingly on the verge of becoming a full member of the Shanghai Cooperation Organization (SCO); Moscow is actively lobbying for it.

This means Turkey acceding to a privileged position as a major hub simultaneously in the Eurasian Economic Belt and of course the Chinese New Silk Road(s). The EU blocks Turkey? Turkey looks East. That’s Eurasian integration on the move.

Washington has tried very hard to create a New Berlin Wall from the Baltics to the Black Sea to “isolate” Russia. And yet Team “Don’t Do Stupid Stuff” in Washington never saw it coming – yet another Putin judo/chess/go counterpunch applied exactly across the Black Sea.

Asia Times Online has been reporting for years how Turkey’s key strategic imperative is to configure itself as the indispensable energy crossroads from East to West – transiting everything from Iraqi oil to Caspian Sea gas. Oil from Azerbaijan already transits Turkey via the Bill Clinton/Zbig Brzezinski-propelled BTC (Baku-Tblisi-Ceyhan) pipeline. Turkey would also be the crossroads if a Trans-Caspian pipeline is ever built (slim chances as it stands), pumping natural gas from Turkmenistan to Azerbaijan, then transported to Turkey and finally Europe.

So what Putin’s judo/chess/go counterpunch accomplished with a single move is to have stupid EU sanctions once again hurt the EU. The German economy is already hurting badly because of lost Russia business.

The EC brilliant “strategy” revolves around the EU’s Third Energy Package, which requires that pipelines and the natural gas flowing inside them must be owned by separate companies. The target of this package has always been Gazprom – which owns pipelines in many Central and Eastern European nations. The target within the target has always been South Stream.

Now it’s up to Bulgaria and Hungary, which have always fought the EC “strategy”, to explain the fiasco to their own populations, and to keep pressing Brussels; after all they are bound to lose a fortune, not to mention get no gas, with South Stream out of the picture. Bulgaria alone reportedly has lost more than 6,000 new jobs and over $3 billion of investment due to the loss of South Stream.

So here’s the bottom line; Russia sells even more gas – to Turkey; Turkey gets much-needed gas with a cool discount; and the EU, pressured by the Empire of Chaos, is reduced to dance, dance, dance like a bunch of headless chickens in dark Brussels corridors wondering what hit them. And while the Atlanticists are back to default mode – cooking up yet more sanctions – Russia is set to keep buying more and more gold.

Watch those spears
This is not the endgame – far from it. In the near future, many variables will intersect.

Ankara’s game may change – but that’s far from a given. President Recep Erdogan – the Sultan of Constantinople – has certainly identified a rival, Caliph Ibrahim of ISIS/ISIL/Daesh fame, trying to steal his mojo. Thus the sultan may flirt with mollifying his neo-Ottoman dreams and contemplate steering Turkey back to its previously ditched “zero problems with our neighbors” foreign policy doctrine.

Not so fast. Erdogan’s game so far was the same as that of the House of Saud and Qatar’s House of Thani; get rid of Syrian President Bashar al-Assad to allow an oil pipeline from Saudi Arabia and a gas pipeline from the South Pars/North Dome mega-field in Qatar. This pipeline would be Qatar-Iraq-Syria-Turkey, rivaling the already proposed, $10 billion Iran-Iraq-Syria pipeline. Final customers: the EU, of course, desperate in its “escape from Gazprom” offensive.

So what now? Will Erdogan abandon his “Assad must go” obsession? It’s too early to tell. The Turkish Foreign Ministry is spinning to the media that Washington and Ankara are about to agree on a no-fly zone along the Turkish-Syria border – even as the White House, earlier this week, insisted the idea had been scrapped.

The House of Saud is like a camel lost in the Arctic. The House of Saud’s lethal game in Syria always boiled down to regime change so that the Saudi-sponsored oil pipeline from Syria to Turkey might be built. Now the Saudis see Russia about to supply all of Turkey’s energy needs – and still be positioned to sell more gas to the EU in the near future. And Assad still won’t go.

But it is US neo-cons who are sharpening their poisonous spears with gusto. As soon as early 2015 there may be a Ukrainian Freedom Act in the US House of Representatives. Translation: Ukraine being dubbed a “major US non-NATO ally”, which means, in practice, a virtual NATO annexation. Next step: more turbo-charged neo-con provocation of Russia.

A possible scenario is vassal/puppies such as Romania or Bulgaria, pressed by Washington, deciding to allow full access of NATO vessels into the Black Sea. Who cares that this would violate current Black Sea agreements that affect both Russia and Turkey?

And then there’s a dangerous Rumsfeldian “known unknown”: how the fragile Balkans will feel subordinated to the whims of Ankara. As much as Brussels keeps Greece, Bulgaria and Serbia in a strait jacket, in energy terms they will start depending on Turkey’s goodwill.

For the moment, let’s appreciate the magnitude of the geopolitical shockwaves after Putin’s latest judo/chess/go combo. And get ready for another chapter of Russia’s “pivoting across Eurasia”. Putin hits Delhi next weekend. Expect another geopolitical bombshell.

Pepe Escobar’s new book, just out, is Empire of Chaos. Follow him on Facebook.

 

 

 

Pepe Escobar is the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007), Red Zone Blues: a snapshot of Baghdad during the surge (Nimble Books, 2007), and Obama does Globalistan (Nimble Books, 2009).

Drilling Deeper: Interview with J. David Hughes

Off the microphones of J. David Hughes, Monsta & RE

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Aired on the Doomstead Diner on December 1, 2014

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Drilling Deeper: A Reality Check on U.S. Government Forecasts for a Lasting Tight Oil & Shale Gas Boom

cover_Drilling-Deeper_300w (2)http://shalebubble.postcarbon.org/wp-content/uploads/2013/02/David-Hughes-debate.jpgAbout a month ago, we had an opportunity to interview J. David Hughes, author of the recent report Drilling Deeper for the Post Carbon Institute.  The report takes a detailed look at the fracking plays being made around the country which the MSM and Oil Industry shills have claimed will develop energy Independence for the FSoA.  We held onto the podcast until December 1st, at the request of the PCI media department.

In the intervening time since we recorded the broadcast, the price of Oil has further dropped from the $80 or so it was then, now down to around $69 in the last price quote I saw for WTI Crude.  This price is now down so low it is below the “Best Estimate” and is a worst case scenario for the drillers.  Oil Rigs are already being shut in in the Bakken, and the longer the low prices are maintained, the more will go down.

From the Texas Star-Telegram:

Falling oil prices could cause pullback in Texas production

Posted Friday, Nov. 28, 2014

OPEC’s decision to maintain production levels instead of cutting them caused oil prices to plummet, leading some analysts to predict a “pullback” in domestic oil production.

The price of U.S. crude fell by 10 percent Friday to $66.15 a barrel after the oil cartel decided at its meeting in Vienna on Thursday to leave production at 30 billion barrels a day. Member nations are worried they’ll lose market share if they lower production.

Shares of companies across the energy industry fell, with Chevron sliding 5 percent and Irving-based Exxon Mobil falling 4 percent. Halliburton, the oil field services company, saw its shares drop nearly 11 percent.

Bernard Weinstein, an economist at Southern Methodist University’s Maguire Energy Institute, said it is too early to tell the full impact of the falling oil prices. But for Texas, the No. 1 oil- and gas-producing state, it is not “good news.”

“I think we’re definitely going to see some pullback. We’ll see the rig count go down,” Weinstein said. “Wells that are already producing will not be shut down, but we’ll see less drilling activity.”

Tom Kloza, chief oil analyst at the Oil Price Information Service, had told the Star-Telegram that Thanksgiving week would be a “Super Bowl week on oil fundamentals” because of the OPEC meeting. He now expects the price to fall an additional $5 or $10 a barrel before stopping.

“It’s that kind of rout,” Kloza told The Associated Press on Friday .

Partly because of the shale production boom in the U.S., the world is awash in oil at a time when demand from major economies is weak — so prices are falling. Citibank analysts wrote in a report Thursday that global supplies exceed demand by about 700,000 barrels a day now.

Overall, the slide is a boon for consumers, with gasoline prices at their lowest point since 2010.

The national average was $2.79 on Friday. Kloza expects gas to eventually be a full $1 below its June peak of about $3.70 a gallon. That would save typical households $60 a month for those that burn 60 gallons of fuel.

“It’s a nice easy calculation,” Kloza said. “These are numbers that we would have regarded three or four months ago as something from the lunatic fringe.”

The bottom should come between $2.50 and $2.70, Kloza said.

But there are some negatives to the euphoria over paying less at the pump, Weinstein said.

A decade ago, the oil and gas industry accounted for about 2 percent of the gross domestic product. Now it’s more like 8 percent, he said.

Besides the energy companies themselves, the industry includes those that provide materials needed for drilling, he said.

The companies that will immediately feel the impact are the small to midsize energy firms that started in the past few years and took on too much debt, he said.

“They went to the bank and they borrowed $100 million and so their revenue stream is down and they can’t cover their costs,” Weinstein said. “They will cut back first.”

So a big drop in the price of oil sends a “ripple effect throughout the economy,” Weinstein said.

In our interview, David also highlights the CapEx problems with natural gas, and the reason building expensive pipelines and export terminals doesn’t make economic sense given the rapid depletion of these fields, even in the “sweet spots”.

For the rest, listen to the Interview, and read the report if you have a lot of time on your hands.

Update on US natural gas, coal, nuclear, and renewables

Off the keyboard of Gail Tverberg

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Published on Our Finite World on August 25, 2014

oilwell

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On August 6, I wrote a post called Making Sense of the US Oil Story, in which I looked at US oil. In this post, I would like to look at other sources of US energy. Of course, the energy source we hear most about is natural gas. We continue to be a net natural gas importer, even as our own production rises.

Figure 1. US natural gas production and consumption, based on EIA data.

US natural gas production leveled off in 2013, because of the low level of US natural gas prices. In 2013, there was growth in gas production in Pennsylvania in the Marcellus, but many other states, including Texas, saw decreases in production. In early 2014, natural gas prices have been higher, so natural gas production is rising again, roughly at a 4% annual rate.

The US-Canada-Mexican natural gas system is more or less a closed system (at least until LNG exports come online in the next few years) so whatever natural gas is produced, is used. Because of this, natural gas prices rise or fall so that demand matches supply. Natural gas producers have found this pricing situation objectionable because natural gas prices tend to settle at a low level, relative to the cost of production. This is the reason for the big push for natural gas exports. The hope, from producers’ point of view, is that exports will push US natural gas prices higher, making more natural gas production economic.

The Coal / Natural Gas Switch

If natural gas is cheap and plentiful, it tends to switch with coal for electricity production. We can see this in electricity consumption–natural gas was particularly cheap in 2012:

Figure 2. Selected Fuels Share of US Electricity - Coal, Natural Gas, and the sum of Coal plus Natural Gas

Coal use increased further in early 2014, because of the cold winter and higher natural gas prices. In Figure 2, there is a slight downward trend in the sum of coal and natural gas’s share of electricity, as renewables add their (rather small) effect.

If we look at total consumption of coal and natural gas (Figure 3), we find it also tends to be quite stable. Increases in natural gas consumption more or less correspond to decreases in coal consumption. New natural gas power plants should be more efficient than old coal power plants in producing electricity, putting downward pressure on total coal plus natural gas consumption. Also, we are using more efficient lighting, refrigerators, and monitors for computers, holding down electricity usage, and thus both coal and gas usage. Better insulation is also helpful in reducing home heating needs (whether by electricity or natural gas).

Figure 3. Layered US consumption of coal and natural gas, based on EIA data.

Another factor in the lower electricity usage (and thus lower coal and natural gas usage) is fewer household formations since 2007. Young people who continue to live with their parents don’t add as much electricity usage as ones who set up their own households do. Low household formations are related to a lack of good-paying jobs.

Coal Production / Consumption

US coal production hit its maximum level in 1998, with production tending to decline since then. US coal consumption has been dropping faster than production, so that exports (difference between production and consumption) have been rising (Figure 4).

Figure 4. US coal production and consumption based on EIA data.

In 2012, about 16% of coal produced was exported. This percentage dropped to about 10% in 2013, with greater US coal usage.

Coal tends to cause pollution of several types, including higher carbon dioxide levels. It also tends to be less expensive that most other fuels, so world demand remains high. Worldwide, coal use continues to grow.

Nuclear and Hydroelectric

Hydroelectric is the original extender of fossil fuels. Hydroelectricity using concrete and metals became feasible in the 1800s, when we began using coal to provide the heat necessary to make metals and concrete in quantity. The first hydroelectric power plants were put in place in the US in the 1880s.  As recently as 1940, hydroelectric provided 40% of the United States’ electrical generation.

Nuclear electric power was the next major extender of fossil fuels. The first nuclear power was added to the US energy mix in 1957, according to EIA data. The big ramp up in nuclear began in the 1970s and 1980s. Similar to hydroelectricity, nuclear requires fossil fuels to build and maintain its plants making electricity.

If we look at the US distribution of fuels, we see that in recent years, nuclear has been a much bigger source of energy than hydroelectricity.

Figure 5. US Energy Consumption, showing the various fossil fuel extenders separately from fossil fuels, based on BP data.

The above comparison includes all types of energy, not just electricity. The grouping GeoBiomass is a BP grouping including geothermal and various forms of wood and other biomass energy, including sources such as landfill gas and other energy from waste. Note that GeoBiomass, Biofuels, and Solar+Wind are hard to see on Figure 5, because of their small quantities.

If we look at hydro and nuclear separately for recent years (Figure 6, below), we see that nuclear has tended to grow, while hydro has tended to fall, although both now seem to be  on close to a plateau. Hydro tends to be more variable than nuclear because it depends on rainfall and snow pack, things that vary from year to year and month to month.

Figure 6. Comparison of US nuclear and hydroelectric consumption, based on EIA data.

The reason why hydro has tended to decrease in quantity over time is that it takes maintenance (using fossil fuels) to keep the aging power plants in operation and silt removed from near the dams. Most of the good locations for dams are already taken, so not much new capacity has been added.

Nuclear power plant electricity production has grown even since the 1986 Chernobyl accident because the United States has continued to expand the capacity of existing nuclear facilities. I do not expect this trend to continue, for a variety of reasons. Not all such capacity expansions have worked out well. The capacity expansion of the San Onofre plant in California in 2010 experienced premature wear and is now being decommissioned. Many of the nuclear plants built in the 1970s are reaching  the ends of their useful lives. Unless we add a large number of new nuclear plants in the next few years, it seems likely that US generation of nuclear electricity will be falling over the next 20 years.

Other Energy Types

It is easier to see other energy types if we look at them as a percentage of US total energy consumption. The following is a graph of “renewables” as a percentage of US energy consumption, using EIA data:

Figure 7. Renewables are percentage of US energy consumption, using EIA data (but groupings used by BP).

A person can see that over the long haul, hydroelectric has tended to shrink as a percentage of energy consumption, as energy needs grew and hydroelectric failed to keep up.

The GeoBiomass category is BP’s catch-all category, mentioned above.1 It (theoretically) includes everything from the wood we burn in our fireplaces to the charcoal briquettes we use to cook food outdoors, to home heating with wood or briquettes to the burning of sawdust or wood pieces in power plants. It also includes geothermal, which is about 6% as large as hydroelectric, and is increasing gradually over time. Based on EIA data, biomass isn’t growing either in absolute amount or as a percentage of total energy consumed.

Biofuels are liquid fuels made from biomass used to extend oil consumption. In the US, the major biofuel is ethanol, made from corn. It is used to extend gasoline, generally up to 10%.  A chart of production and consumption shows that US biofuel production “topped out,” once it hit the 10% of gasoline “blendwall”.

Figure 8. US biofuel production and consumption, based on EIA data.

Biofuels now amount to 5.7% of US petroleum (crude oil plus natural gas liquids) consumption. In recent years, the US is a slight exporter of biofuels.

Corn ethanol currently takes about 40% of US corn production, according to the USDA (Figure 9). Greater corn plantings would put pressure on land usage for other crops.

USDA corn use, from USDA site.

If someone figures out how to make cellulosic ethanol cheaply (perhaps from wood), it presumably will cut into the market for corn ethanol, unless the blend wall is raised to 15%. Without additional ethanol coming from a source such as cellulosic ethanol, such an increase in the maximum blending percentage would likely be problematic.

Wind and Solar PV

Wind and Solar PV are sources of US electricity, so really need to be compared in that context. If we compare nuclear, hydroelectric, and all renewable electricity other than hydro (including electricity from wood, sawdust, and waste, and from geothermal, in addition to wind and solar) we see that in total, all other renewables are approximately equal to hydro electricity in quantity:

Figure 10:  Hydroelectric, other renewables, and nuclear as a percentage of US electricity supply, based on EIA data.

If we look at the pieces of other renewables separately, we see the following:

Figure 11. Wind, solar/PV and other renewables as a percentage of US electricity, based on EIA data.

Wind energy has indeed grown in quantity. Solar/PV is growing, but from a very small base. The remainder, which includes geothermal, wood and various waste products, is growing a bit.

A major issue with wind and solar is that we badly need a “solution” to our energy problem, so these are “pushed,” whether they are really helpful or not. Some issues involved:

(a) Cost effectiveness. Studies (such as by Brookings Institution, Weissbach et al., Graham Palmer) show that wind and solar PV are not cost-effective for reducing carbon emissions. If we want to reduce carbon emissions, conservation or switching from coal to natural gas would be more cost effective.

(b) Peak supply or peak affordability (demand in economists’ language)? The peak oil “story” often seems to be that because of inadequate supply, oil and other fossil fuel prices will rise, and substitutes will suddenly become competitive. This story is used to support a switch to wind and solar PV and high priced biofuels, since the expected high prices of fossil fuels will supposedly support the high cost of renewables.

Unfortunately, the story is wrong. High prices of any fuel tend to lead to recession because wages don’t rise to match the high prices. Also, a country using the high-priced fuel tends to become less competitive compared to countries that don’t use the high-priced fuel. The net effect is that prices don’t rise very much. Instead, manufacturing moves to countries that use less-expensive fuels. Oil prices may fall so low (relative to the cost of oil production) that oil producers sell their land and increase dividends to shareholders instead; in fact, this seems to be happening already.

(c) Hoped for long-term life. If fossil fuels have problems, can “renewables” have long life-spans in spite of those problems? Not that I can see. It takes fossil fuels to maintain the electric grid and to produce any modern renewable, such as wind, or solar PV or wave energy. Wind turbines need frequent replacement of parts, and solar PV needs new “inverters.” Wood and biomass will have long lives, if not overused, but these won’t keep the electric grid operating.

(d) Apples to oranges cost comparisons. There are a few situations where wind and solar PV are used to substitute for oil–for example, on islands, where oil is used to operate electricity generation. In these cases, wind and solar PV are likely already competitive, without subsidies. In these situations, per capita use of electricity can be expected to be very low, because exports made with such high-priced electricity will be non-competitive in the world market-place.

The confusion comes elsewhere, where substitution is for natural gas, coal, or nuclear energy. Here, the savings to an electric company is primarily a savings in fuel cost, that is, the cost of the natural gas, or coal or uranium. The plant’s manpower needs and its cost of electric grid maintenance will be the same (or higher). There may be costs associated with monitoring the new sources of electricity added to the grid or additional balancing costs, and these need to be considered as well.

If we want to maintain the electric grid so we can continue to have electricity for a variety of purposes, the “correct” credit for intermittent renewables is the savings to the power companies–which is likely to be close to the savings in fuel costs, or about 3 cents per kWh on the mainland United States. This is far less than the “net metering” benefit (offering a benefit equal to the retail cost of electricity) that is often used for grid-tied solar PV. It is also generally less than the “wholesale time of day” cost of electricity, often used for wind.

Germany is known for its encouragement of wind and solar PV, using liberal funding for the renewables. This approach has adverse ramifications, including high electricity costs, less grid stability, closure of some traditional natural gas power plants, and rising carbon dioxide emissions. A recent article called Germany’s Electricity Market Out of Balance by the Institute for Energy Research summarizes these issues.

Summary

It would be great if we had a solution for our non-oil energy issues, but we really don’t. The closest we can perhaps come is scaling up natural gas consumption some, and reducing coal’s current portion of the electricity mix. We currently have a large amount of coal consumption relative to natural gas consumption (Figure 3), so we ourselves have good use for rising natural gas production, if it should actually take place.

The “catch” in scaling up natural gas consumption is a price “catch.” If the price of natural gas price rises too high relative to coal, then electricity production starts switching back to coal. If, on the other hand, natural gas prices don’t rise very much, not much of an increase in production is likely to be available. Producers would like to export (a lot of) natural gas to Europe, as a way of jacking-up US natural gas prices. This seems like a pipe dream. See my article The Absurdity of US Natural Gas Exports.

Nuclear is a big question mark. If the United States starts taking much nuclear off line, it will leave a big hole in electricity generation, especially in the Eastern part of the US. Germany and recently Belgium are starting to experience the effect of taking nuclear off line. It is hard to see how wind and solar PV can play a very big role in offsetting the nuclear loss.

Politicians need to have a “solution” they can call an energy savior, but it is hard to see that renewables will play more than a small role. Biofuels seem to have “topped out” for now. Wind and solar PV are still growing, but it is hard to justify subsidies for them, as part of the electric grid system. Solar PV does have uses off grid, if citizens want their own source of electricity, with their own inverters and back-up batteries. There are also business uses of this type–for example, to operate equipment in a remote location.

I have not tried to cover all of the various smaller items. There may also be growth possibilities for items that I have not discussed, such as solar thermal for heating hot water, particularly in warm parts of the United States.

Note:

[1] I have used BP’s GeoBiomass grouping for convenience, but I am adding together EIA data amounts. What is included in the “biomass” portion of GeoBiomass seems to vary from agency to agency (BP, EIA, IEA), because of different definitions of what is included. For example, is animal dung burned as fuel included? Is fuel that is gathered by a family, rather than purchased, included? I am using EIA data for US renewables in Figure 7, since its long-term data series is probably as good as any for the US.

West Isolating Itself with Sanctions Against Russia

Off the keyboard of Anthony Cartalucci

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Published on Land Destroyer on July 30, 2014

Sanctions

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July 30, 2014 (Tony Cartalucci – NEO) – Citing the downing of Malaysia Airlines flight MH17 as impetus, US President Barack Obama announced stronger sanctions against Russia leveled by both the US and EU. This comes after previous sanctions implemented before the downing of MH17 failed to garner support across Europe, leaving the US measures politically and economically impotent. In the wake of American sanctions, pundits, politicians, and corporate-lobbyists decried Europe’s desire to continue doing business with Russia, claiming US sanctions alone would only hurt US corporations leaving a void gladly filled by Europe and others. 

MH17 – The Convenient Impetus 

With the “serendipitous” downing of MH17, this geopolitical calculus changed abruptly, and US President Barack Obama, even while admitting investigations were ongoing, invoked the tragedy to justify both the pressure put on Europe to finally impose stronger sanctions against Russia, but also as a means to sell the decision to a public targeted by weeks of baseless anti-Russian propaganda 

Clearly MH17 is being exploited, and especially so since investigations are still under way and no conclusions – or even preliminary results – have been announced. At face value, the West exposes itself as shameless opportunists leveraging human misery to advance their geopolitical ambitions. But Washington, London, and Brussels’ actions also raise serious suspicion over their possible role in the downing of the aircraft. While evidence is forthcoming, a motive for the West to have shot the aircraft down and blame Russia has been demonstrably established. 

Despite the “convenience” of the MH17 tragedy and the expediency with which the West has exploited it, this latest attempt to ram through ineffectual sanctions indicate increased desperation from Washington, London, and Brussels, not a renewed initiative in Ukraine, or against Russia as a whole. 


Sanctions Don’t Work

Sanctions haven’t worked against nations many times smaller and economically weaker than Russia, and they won’t work against Russia. In fact, the sanctions will instead motivate Moscow to build stronger ties elsewhere, as well as become stronger internally. Many of the sanctions will not even bite for years to come – if ever. Europe was initially reluctant to level sanctions against Russia, not because of any particular affinity for Moscow, but because they would suffer economically as a result of implementing them. Western think-tanks bemoaned Europe’s insistence that the “pain” be shared equally – pain the sanctions were surely to cause all those who agreed to them. 

It took the shameless political exploitation of a tragedy to twist Europe’s collective arms into agreeing to the measures now being taken, measures that will immediately begin effecting European nations dependent on long-standing economic ties with Russia and ties that cannot be easily replaced.

Japan likewise, citing nothing other than a desire to “cooperate with G7,” issued new sanctions against Russia – Japan also being a nation that cannot afford narrowing prospects for its declining economy.

ITAR-TASS News Agency in an article titled, “Japan prepares to impose new sanctions on Russia,” stated:

“Japanese government is preparing to impose new sanctions on Russia, Japanese Chief Cabinet Secretary Yoshihide Suga told a news conference on Wednesday.

“We are preparing to take additional measures, including freezing of bank accounts. We intend to give a proper response with an emphasis on co-operation with G7 partners,” Suga said.

Russia responded by pointing out Japan’s inability to establish independent foreign policy of its own and instead pursue self-destructive edicts dictated by Washington. Indeed, what the West is doing is isolating itself from a growing mulipolar world that refuses to recognize or remain beholden to a waning unipolar international order centered around Wall Street and London. While the US, EU, and Japan constitute immense economies, technology and progress elsewhere has led to emerging economies that have the potential to eclipse them all. In China alone, Russia has been looking to hedge economic risk by developing ties with the growing nation.

Despite attempts to disrupt growing Russian-Chinese relations through terrorism and political subversion, sanctions against Russia and continued belligerence as part of the West’s “pivot to Asia” serve only to drive these two emerging powers closer together.

The Myth of Ukrainian Self-Determination 

In addition to citing MH17 as grounds for leveling new sanctions, Obama also claimed that Ukraine had a right to determine its own destiny and therefore continued interference from Russia could not be tolerated. This betrays the true genesis of the current Ukrainian conflict. The current regime occupying Kiev was installed by NATO to serve EU interests – with US Senator John McCain whose National Endowment for Democracy (NED) subsidiary, the International Republican Institute (IRI) funded the various fronts that led and supported the 2013-2014 “Euromaidan” mobs, literally taking to the stage during the protests to offer support for the Neo-Nazi Svoboda Party in Kiev

What the US means to say is Russia’s interference with NATO’s plans to subvert, overthrow, and replace political orders along Russia’s borders with belligerent NATO proxies will not be tolerated – a similar scenario that played out along Russia’s borders when Adolf Hitler’s Nazis likewise carried out a regional campaign of covert and outright military aggression ultimately aimed at Moscow itself.    

Rush to War? 

Provocations against Russia are increasing, as is the rhetoric to attempt to sell some sort of wider confrontation between NATO and Russia. Unfortunately for the West, sanctions, grisly disasters they “serendipitously” stood to benefit from but can’t, and even attempting to wind up their respective populations for a military confrontation with nuclear-armed Russia appear only as “bad, worse, and the worst” of all possible options. 
Analysts fear growing desperation from the West who can neither move forward, nor retreat, will resort to increasingly desperate and destructive tactics to change the tide in Ukraine, and against Russia and the growing multipolar order it represents. But when sanctions and what appears to have been a false flag attack have failed utterly, what is left besides war? However, even war is an untenable prospect for the West – that while feasible and likely to catch most off guard as an opinion not considered to be on the table – it is a prospect that could initially succeed but ultimately backfire just as Hitler’s invasion of the Soviet Union did during World War II. 

But when it’s not the money or the blood of the special interests driving this confrontation with Russia being spent, what does the West have to lose by trying?  Russia will have to continue being smart, patient, prudent, and let the West’s ill-intents destroy itself. No matter how weak or desperate the West may appear throughout was appears to be irreversible decline, the one mistake to be made would be underestimating what Washington, London, and Brussels could do in their death throes. From theaters along Russia’s immediate peripheries, to interests across the Middle East and North Africa – Syria included – maximum vigilance is required to guard against the vindictive spite of an antiquated, dying international order.

Interview with Ron Patterson: Peak Oil

Off the microphones of Ron Patterson, Monsta and RE

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Aired on the Doomstead Diner on July 31, 2014

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Discuss this Interview at the Energy Table inside the Diner

Ron Patterson has a long history following the Peak Oil phenomenon, know by many veterans of The Oil Drum as Darwinian.

Since the demise of TOD, Ron has been running PeakOilBarrel.com, where he presents current analysis of what is coming down the pipe, literally.

Based on his current analysis, Ron expects that Peak Production on Crude Oil is current in 2013-15, and decline will begin seriously in 2016.  Below you find the most recent list charts from Ron.

In the interview, we look at the data and projected possibilities and effects as the decline in production accelerates over time.

Further discussion with Ron on the possible outcomes of Peak Oil are explored in Part II, coming soon on the Diner.

Here is the most recent list of charts from Ron:

Anticipating the Peak of World Oil Production

These are indeed good times to be a Peak Oiler. All the  peak oil deniers are dancing with wild exuberance, pointing to that spike of US shale oil production that they believe drives the final nail in the “Peak Oil Theory” coffin. And it is all happening right before reality slaps them in the face.

There is no doubt that world Crude + Condensate production, without that tight oil spike, has been on a ten year bumpy plateau.

World Less USA A

But, you may ask, when the shale bubble burst, won’t that only mean we will still stay on that bumpy plateau? No for several reasons. First the bursting of the shale bubble will likely cause a decline in US production of perhaps half a million barrels per day per year for three to four years. Second Russia, whose production increase of over 1.5 million barrels per day over the past ten years has kept us on this bumpy plateau, is now in decline.

And third, five nations that have shown considerable increase over the past few years now seem to have peaked.

China et al

These five nations, who’s 2 million barrel per day increase since mid 2004, have also kept us on that plateau. Their combined production plateaued a year and a half ago. I don’t expect them to decline very fast but they will not add anything to world production in the next few years.

 

The only nations that are not at or near their peak are Canada, Kazakhstan and Iraq. Kazakhstan hopes to bring the much delayed and way over budget Kashagan field on line in 2016. The once hoped for 1.5 million barrels per day output from Kashagan now appears to be greatly downgraded. Downgraded perhaps to well under .5 million barrels per day.

Iraq, in light of the ongoing conflict there, is unlikely to increase very much if any at all in the next five years or so. In fact Iraq’s production will very likely fall in the near future. Canada will likely continue to increase tar sands production at a slower rate.

But back to Russia!

Russia CDU TEK

Jodi has Russia peaking in November 2013 at 10,127,000 bp/d. The EIA has them also peaking in November at 10,209,000 bp/d. The Russian web site CDU TEK has them peaking at 1,458,000 tons per day. Figuring 7.27 barrels per ton that comes to 10,602,000 barrels per day. I think the EIA figures are the closest but anyway….

Russia CDU TEK

This is a daily chart of 2014 using 7.27 barrels per ton. Both this and the monthly chart are through July 24th. The spikes down in July are an anomaly, most likely caused by pipeline shutdowns due to Siberian wildfires. However I expect the August numbers to be considerably lower than the June production numbers.

Bottom line, there is no doubt that Russia is now in decline and with the political problems there now the problem is likely to get worse, perhaps a lot worse. Here is what Ambrose Evans-Pritchard writing in The Telegraph says, bold mine:

The proposed sanctions will target both the debt and equity of Russia’s major banks, effectively severing access to global capital markets. It also targets the technology for drilling in the Arctic and for opening up the Bazhenov shale basin, both needed to replace Russia’s depleting oil reserves.

Russia has a lot of gas, but gas trades at an oil-equivalent price of $60bn a barrel in Europe. It is not very profitable. Analysts suspect that Gazprom’s pipeline deal with China is at or below the break-even cost of production, assuming it ever happens.

The International Energy Agency says Russia needs $750bn of fresh investment over the next 20 years just to stop oil and gas output declining. This has already become unthinkable. Who is going to wager so much money, for such questionable returns, in the face of so much political risk?

Unthinkable indeed, and then this: Russia Oil Exports by Sea to Reach 6-Year Low

Seaborne crude shipments from the world’s biggest energy exporter via the state-run pipeline system in August will fall 9.2 percent from this month to 2.215 million barrels a day, according to loading programs obtained by Bloomberg News. That’s the lowest since Bloomberg began tracking the data in 2008. Russia’s two biggest crude terminals, Primorsk and Novorossiysk, will both export the least on record.

I don’t understand why these Russian oil production and export problems are not all over the news? They should be headlines but using google news “Russian Oil Production” you get almost nothing.

Okay we have discussed Russia, the USA, Kazakhstan, Canada and Iraq, and the five countries in the second chart up top, China, Colombia, Oman, Kuwait and the UAE, but what about the rest of the world? What can we expect from them?

Rest of the World

We can expect them to keep doing what they have done for since peaking in 2005, they will continue to decline. Combined they have declined 6 million barrels per day in the past nine years. I don’t expect that decline rate to slow.

I will close this post with one of Gail Tverberg’s charts from her latest post:
World Oil Production at 3/31/2014–Where are We Headed?

Gail's Graph

See that little green spike on the very right of the chart? That is what the peak oil deniers are all cheering about. That little spike is responsible for the death of peak oil, or so they think. Boy are they in for a shock.

World Oil Production at 3/31/2014–Where are We Headed?

Off the keyboard of Gail Tverberg

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Published on Our Finite World on July 23, 2014

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The standard way to make forecasts of almost anything is to look at recent trends and assume that this trend will continue, at least for the next several years. With world oil production, the trend in oil production looks fairly benign, with the trend slightly upward (Figure 1).

Figure 1. Quarterly crude and condensate oil production, based on EIA data.

If we look at the situation more closely, however, we see that we are dealing with an unstable situation. The top ten crude oil producing countries have a variety of problems (Figure 2). Middle Eastern producers are particularly at risk of instability, thanks to the advances of ISIS and the large number of refugees moving from one country to another.

Figure 2. Top ten crude oil and condensate producers during first quarter of 2014, based on EIA data.

Relatively low oil prices are part of the problem as well. The cost of producing oil is rising much more rapidly than its selling price, as discussed in my post Beginning of the End? Oil Companies Cut Back on Spending. In fact, the selling price of oil hasn’t really risen since 2011 (Figure 3), because citizens can’t afford higher oil prices with their stagnating wages.

Figure 3. Average weekly oil prices, based on EIA data.

The fact that the selling price of oil remains flat tends to lead to political instability in oil exporters because they cannot collect the taxes required to provide programs needed to pacify their people (food and fuel subsidies, water provided by desalination, jobs programs, etc.) without very high oil prices. Low oil prices also make the plight of oil exporters with declining oil production worse, including Russia, Mexico, and Venezuela.

Many people when looking at future oil supply concern themselves with the amount of reserves (or resources) remaining, or perhaps Energy Return on Energy Invested (EROEI). None of these is really the right limit, however. The limiting factor is how long our current networked economic system can hold together. There are lots of oil reserves left, and the EROEI of Middle Eastern oil is generally quite high (that is, favorable). But instability could still bring the system down. So could popping of the US oil supply bubble through higher interest rates or more stringent lending rules.

 

The Top Two Crude Oil Producers: Russia and Saudi Arabia

When we look at quarterly crude oil production (including condensate, using EIA data), we see that Russia’s crude oil production tends to be a lot smoother than Saudi Arabia’s (Figure 4). We also see that since the third quarter of 2006, Russia’s crude oil production tends to be higher than Saudi Arabia’s.

Figure 4.  Comparison of quarterly oil production for Russia and Saudi Arabia, based on EIA data.

Both Russia and Saudi Arabia are headed toward problems now. Russia’s Finance Minister has recently announced that its oil production has hit and peak, and is expected to fall, causing financial difficulties. In fact, if we look at monthly EIA data, we see that November 2013 is the highest month of production, and that every month of production since that date has dropped from this level. So far, the drop in oil production has been relatively small, but when an oil exporter is depending on tax revenue from oil to fund government programs, even a small drop in production (without a higher oil price) is a financial problem.

We see in Figure 4 above that Saudi Arabia’s quarterly oil production is quite erratic, compared to oil production of Russia. Part of the reason Saudi Arabia’s oil production is so erratic is that it extends the life of its fields by periodically relaxing (reducing) production from them. It also reacts to oil price changes–if the oil price is too low, as in the latter part of 2008 and in 2009, Saudi oil production drops. The tendency to jerk oil production around gives the illusion that Saudi Arabia has spare production capacity. It is doubtful at this point that it has much true spare capacity. It makes a good story, though, which news media are willing to repeat endlessly.

Saudi Arabia has not been able to raise oil exports for years (Figure 5). It gained a reputation for its oil exports back in the late 1970s and early 1980s, and has been able to rest on its laurels. Its high “proven reserves” (which have never been audited, and are doubted by many) add to the illusion that it can produce any amount it wants.

Figure 5. Comparison of Russian and Saudi Arabian oil exports, based on BP Statistical Review of World Energy 2014 data. Pre-1985 Russian amounts estimated based on Former Soviet Union amounts.

In 2013, oil exports from Russia were equal to 88% of Saudi Arabian oil exports. The world is very close to being as dependent on Russian oil exports as it is on Saudi Arabian oil exports. Most people don’t realize this relationship.

The current instability of the Middle East has not hit Saudi Arabia yet, but there is increased fighting all around. Saudi Arabia is not immune to the problems of the other countries. According to BBC, there is already a hidden uprising taking place in eastern Saudi Arabia.

US Oil Production is a Bubble of Very Light Oil

The US is the world’s third largest producer of crude and condensate. Recent US crude oil production shows a “spike” in tight oil productions–that is, production using hydraulic fracturing, generally in shale formations (Figure 6).

Figure 6. US crude oil production split between tight oil (from shale formations), Alaska, and all other, based on EIA data. Shale is from  AEO 2014 Early Release Overview.

If we look at recent data on a quarterly basis, the trend in production also looks very favorable.

Figure 7. US Crude and condensate production by quarter, based on EIA data.

The new crude is much lighter than traditional crude. According to the Wall Street Journal, the expected split of US crude is as follows:

Figure 8. Wall Street Journal image illustrating the expected mix of US crude oil.

There are many issues with the new “oil” production:

  • The new oil production is so “light” that a portion of it is not what we use to power our cars and trucks. The very light “condensate” portion (similar to natural gas liquids) is especially a problem.
  • Oil refineries are not necessarily set up to handle crude with so much volatile materials mixed in. Such crude tends to explode, if not handled properly.
  • These very light fuels are not very flexible, the way heavier fuels are. With the use of “cracking” facilities, it is possible to make heavy oil into medium oil (for gasoline and diesel). But using very light oil products to make heavier ones is a very expensive operation, requiring “gas-to-liquid” plants.
  • Because of the rising production of very light products, the price of condensate has fallen in the last three years. If more tight oil production takes place, available prices for condensate are likely to drop even further. Because of this, it may make sense to export the “condensate” portion of tight oil to other parts of the world where prices are likely to be higher. Otherwise, it will be hard to keep the combined sales price of tight oil (crude oil + condensate) high enough to encourage more tight oil production.

The other issue with “tight oil” production (that is, production from shale formations) is that its production seems to be a “bubble.”  The big increase in oil production (Figure 6) came since 2009 when oil prices were high and interest rates were very low. Cash flow from these operations tends to be negative. If interest rates should rise, or if oil prices should fall, the system is likely to hit a limit. Another potential problem is oil companies hitting borrowing limits, so that they cannot add more wells.

Without US oil production, world crude oil production would have been on a plateau since 2005.

Figure 9. World crude and condensate, excluding US  production, based on EIA data.

Canadian Oil Production

The other recent success story with respect to oil production is Canada, the world’s fifth largest producer of crude and condensate. Thanks to the oil sands, Canadian oil production has more than doubled since the beginning of 1994 (Figure 10).

Figure 10. Canadian quarterly crude oil (and condensate) production based on EIA data.

Of course, there are environmental issues with respect to both oil from the oil sands and US tight oil. When we get to the “bottom of the barrel,” we end up with the less environmentally desirable types of oil. This is part of our current problem, and one reason why we are reaching limits.

Oil Production in China, Iraq, and Iran

In the first quarter of 2014, China was the fourth largest producer of crude oil. Iraq was sixth, and Iran was seventh (based on Figure 2 above). Let’s first look at the oil production of China and Iran.

Figure 11. China and Iran crude and condensate production by quarter based on EIA data.

As of 2010, Iran was the fourth largest producer of crude oil in the world. Iran has had so many sanctions against it that it is hard to figure out a base period, prior to sanctions. If we compare Iran’s first quarter 2014 oil production to its most recent high production in the second quarter of 2010, oil production is now down about 870,000 barrels a day. If sanctions are removed and warfare does not become too much of a problem, oil production could theoretically rise by about this amount.

China has relatively more stable oil production than Iran. One concern now is that China’s oil production is no longer rising very much. Oil production for the fourth quarter of 2013 is approximately tied with oil production for the fourth quarter of 2012. The most recent quarter of oil production is down a bit. It is not clear whether China will be able to maintain its current level of production, which is the reason I mention the possibility of a decline in oil production in Figure 2.

The lack of growth in China’s oil supplies may be behind its recent belligerence in dealing with Viet Nam and Japan. It is not only exporters that become disturbed when oil supplies are not to their liking. Oil importers also become disturbed, because oil supplies are vital to the economy of all nations.

Now let’s add Iraq to the oil production chart for Iran and China.

Figure 12. Quarterly crude oil and condensate production for Iran, China, and Iraq, based on EIA data.

Thanks to improvements in oil production in Iraq, and sanctions against Iran, oil production for Iraq slightly exceeds that of Iran in the first quarter of 2014. However, given Iraq’s past instability in oil production, and its current problems with ISIS and with Kurdistan, it is hard to expect that Iraq will be a reliable oil producer in the future. In theory Iraq’s oil production can rise a few million barrels a day over the next 10 or 20 years, but we can hardly count on it.

The Oil Price Problem that Adds to Instability

Figure 13 shows my view of the mismatch between (1) the price oil producers need to extract their oil and (2) the price consumers can afford. The cost of extraction (broadly defined including taxes required by governments) keeps rising while “ability to pay” has remained flat since 2007. The inability of consumers to pay high prices for oil (because wages are not rising very much) explains why oil prices have remained relatively flat in Figure 3 (near the top of this post), even while there is fighting in the Middle East.

Figure 3. Comparison of oil price per barrel needed (Brent) with ability to pay. Amounts based on judgement of author.

When the selling price is lower than the full cost of production (including the cost of investing in new wells and paying dividends to shareholders), the tendency is to reduce production, one way or another. This reduction can be voluntarily, in the form of a publicly traded company buying back stock or selling off acreage.

Alternatively, the cutback can be involuntary, indirectly caused by political instability. This happens because oil production is typically heavily taxed in oil exporting nations. If the oil price remains too low, taxes collected tend to be too low, making it impossible to fund programs such as food and fuel subsidies, desalination plants, and jobs programs. Without adequate programs, there tend to be uprisings and civil disorder.

If a person looks closely at Figure 13, it is clear that in 2014, we are out in “Wile E. Coyote Territory.” The broadly defined cost of oil extraction (including required taxes by exporters) now exceeds the ability of consumers to pay for oil. As a result, oil prices barely spike at all, even when there are major Middle Eastern disruptions (Figure 3, above).

The reason why Wile E. Coyote situation can take place at all is because it takes a while for the mismatch between costs and prices to work its way through the system. Independent oil companies can decide to sell off acreage and buy back shares of stock but it takes a while for these actions to actually take place. Furthermore, the mismatch between needed oil prices and charged oil prices tends to get worse over time for oil exporters. This lays the groundwork for increasing dissent within these countries.

With oil prices remaining relatively flat, importers become complacent because they don’t understand what is happening.  It looks like we have no problem when, in fact, there really is a fairly big problem, lurking behind the scenes.

To make matters worse, it is becoming more and more difficult to continue Quantitative Easing, a program that tends to hold down longer-term interest rates. The expectation is that the program will be discontinued by October 2014. The reason why the price of oil has stayed as high as it has in the last several years is because of the effects of quantitative easing and ultra low interest rates. If it weren’t for these, oil prices would fall, because consumers would need to pay much more for goods bought on credit, leaving less for the purchase of oil products. See my recent post, The Connection Between Oil Prices, Debt Levels, and Interest Rates.

Figure 4. Big credit related drop in oil prices that occurred in late 2008 is now being mitigated by Quantitative Easing and very low interest rates.

Because of the expectation that Quantitative Easing will end by October 2014 and the pressure to tighten credit conditions, my expectation is that the affordable price of oil will start dropping in late 2014, as shown in Figure 13. The growing disparity between what consumers can afford and what producers need tends to make the Wile E. Coyote overshoot condition even worse. It is likely to lead to more problems with instability in the Middle East, and a collapse of the US oil production bubble.

Conclusion

I explained earlier that we live in a networked economy, and this fact changes the way economic models work. Many people have developed models of future oil production assuming that the appropriate model is a “bell curve,” based on oil depletion rates and the inability to geologically extract more oil. Unfortunately, this isn’t the right model.

The situation is far more complex than simple geological decline models assume. There are multiple limits involved–prices needed by oil producers, prices affordable by oil importers, and prices for other products, such as water and food. Interest rates are also important. There are time lags involved between the time the Wile E. Coyote situation begins, and the actions to fix this mismatch takes place. It is this time lag that tends to make drop-offs very steep.

The fact that we are dealing with political instability means that multiple fuels are likely to be affected at once. Clearly natural gas exports from the Middle East will be affected at the same time as oil exports. Many other spillover effects are likely to happen as well. US businesses without oil will need to cut back on operations. This will lead to job layoffs and reduced electricity use. With lower electricity demand, prices for electricity as well as for coal and natural gas will tend to drop. Electricity companies will increasingly face bankruptcy, and fuel suppliers will reduce operations.

Thus, we cannot expect decline to follow a bell curve. The real model of future energy consumption crosses many disciplines at once, making the situation difficult to model.  The Reserves / Current Production model gives a vastly too high indication of future production, for a variety of reasons–rising cost of extraction because of diminishing returns, need for high prices and taxes to support the operations of exporters, and failure to consider interest rates.

The Energy Return on Energy Invested model looks at a narrowly defined ratio–usable energy acquired at the “well-head,” compared to energy expended at the “well-head” disregarding many things–including taxes, labor costs, cost of borrowing money, and required dividends to stockholders to keep the system going. All of these other items also represent an allocation of available energy. A multiplier can theoretically adjust for all of these needs, but this multiplier tends to change over time, and it tends to differ from energy source to energy source.

The EROEI ratio is probably adequate for comparing two “like products”–say tight oil produced in North Dakota vs tight oil produced in Texas, or a ten year change in North Dakota energy ratios, but it doesn’t work well when comparing dissimilar types of energy. In particular, the model tends to be very misleading when comparing an energy source that requires subsidies to an energy source that puts off huge tax revenue to support local governments.

When there are multiple limits that are being encountered, it is the financial system that brings all of the limits together. Furthermore, it is governments that are at risk of failing, if enough surplus energy is not produced. It is very difficult to build models that cross academic areas, so we tend to find models that reflect “silo” thinking of one particular academic specialty. These models can offer some insight, but it is easy to assume that they have more predictive value than they do.

Unfortunately, the limits we are reaching seem to be financial and political in nature. If these are the real limits, we seem to be not far away from the simultaneous drop in the production of many energy products. This type of limit gives a much steeper drop off than the frequently quoted symmetric “bell curve of oil production.” The shape of the drop off corresponds to (1) the type of drop off experienced by previous civilizations when they collapsed, (2) the type of drop-off I have forecast for world energy consumption, and (3) Ugo Bardi’s Seneca cliff.  The 1972 book Limits to Growth by Donella Meadows et al. says (page 125), “The behavior mode of of the system shown in figure 35 is clearly that of overshoot and collapse,” so it tends to come to the same conclusion as well.

Toward a Europe Whole & Free [to loot]

Off the keyboard of Anthony Cartalucci

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Published on Land Destroyer on July 10, 2014

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July 10, 2014 (Tony Cartalucci – NEO) – When the special interests who created and direct the agenda of the European Union disagree with member states, the true nature of this supranational enterprise becomes painfully apparent – one of dictatorial special interests pursing regional policy that benefits none of its individual member states. No example of this can be clearer than the dispute that has emerged over the construction of Russia’s South Stream natural gas pipeline set to run through Bulgaria, Serbia, Hungary, and Italy.

The pipeline produces a large number of benefits for each of the nations it passes through, as well as for energy markets on either end of the pipeline. For the people and governments of these nations set to benefit most from the pipeline, the deal is an attractive, long-term investment. For the special interests that have created and currently direct the EU – on the other hand – it poses as a direct threat to their designs of continued expansion and corporate-financier hegemony beyond the collective borders of today’s EU.

For the hegemon, coexistence and collaboration are not options – thus the benefits of the South Stream pipeline escape them. Instead, these hegemonic special interests seek to control their own pipeline and energy markets on either side of it, and this can be seen developing along several fronts including the Southern Corridor Project, beginning in Azerbaijan along the Caspian Sea.

Energy and foreign policy expert Sinan Ulgen of the US government and corporate-financier funded Carnegie Europe think-tank complained about the disparity between the EU Commission’s stance, and that of individual EU member states in an Anadolu Agency (AA) article titled, “Russian South Stream gas pipeline divides EU,” stating:

“…the EU’s main concern about South Stream is that the project would increase its dependence on Russian gas. Last year a third of its consumed gas was supplied by Russia.

Additionally the AA article would state:

While the European Commission opposes Russia’s South Stream gas pipeline project, certain EU countries like Austria and Italy continue to openly support the world’s most expensive pipeline project, which aims to transport Russian gas by bypassing Ukraine.

For the last two years, Russia has signed bilateral agreements with Italy, Bulgaria, Serbia, Hungary, Greece, Slovenia, Austria and Croatia for the construction of the South Stream gas pipeline, which is estimated to cost nearly US$40 billion according to the Moscow Times. Gazprom recently announced however that it was abandoning construction of the Italian portion of the pipeline. 

These agreements were deemed a breach of EU anti-trust law by the European Commission in December. And, in April, following the annexation of the Crimean peninsula by Russia, the European Parliament voted for the South Stream project to be stopped.

AA would also cite another corporate-financier funded think tank, Chatham House – also complaining about EU members pursuing their own interests in contradiction to the EU Commission’s dictates. The unelected EU Commission appears to be pursing its own extraterritorial geopolitical pursuits ahead of those of the individual member states and their respective populations. That corporate-financier funded “think tanks” are focused on this “divide” and championing the EU Commission’s agenda over that of the individual EU members it allegedly represents fully exposes the EU for what it truly is, a dysfunctional supranational dictatorship.

And what is done in the name of the EU by its institutions like the EU Commission, which admittedly does not represent the best interests or desires of those it claims to represent, unfortunately and perhaps unfairly reflects on the EU as a whole. For example, and as part of the energy debate, the current EU support of the regime occupying Kiev, Ukraine, taints all of Europe, even as many EU member states attempt to move cautiously or even in opposition to the greater agenda the EU Commission and others are pursuing.

While the EU promotes itself as a bastion of freedom, stability, and prosperity, it appears increasingly more like a hegemonic bloc, dictating to, rather than acting as a representative of, the European people. The slogan “Toward a Europe Whole and Free” rings hollow when the EU Commission begins dictating policy to individual states, and curtailing progress that benefits both individual nations and their people.

The EU, in this light, appears more of an autocratic oligarchical consolidation of regional power and resources, not a democratic collaboration between nations. A slogan like “Toward a Europe Whole and Free” appears then to represent Europe, but only from the perspective of special interests seeking to loot the region collectively, rather than nation-by-nation. The dysfunction and dictatorial nature of the EU Commission and other apparatuses within the supranational bloc serve as a cautionary example for other nations seeking to construct their own alliances – from Asia’s ASEAN-AEC (Asian Economic Community), to regional alliances between Russia, China and with nations along their peripheries.

Alliances that include obligations that usurp national sovereignty are not alliances at all, they are hegemonic infiltration by special interests who would rather see a village place their valuables in a single safe for them to crack and loot, rather than take the time and trouble to rob each individual home. Europe must decide whether it will continue along a path of internal conflict with its alleged EU representatives tainting their collective populations, cultures, and histories, or reform the EU into an institution that allows collaboration and national sovereignty to exist in tandem.

Debt: Eight Reasons This Time is Different

Off the keyboard of Gail Tverberg

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Published on Our Finite World on July 7, 2014

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In today’s world, we have a huge amount of debt outstanding. Academic researchers Carmen Reinhart and Kenneth Rogoff have become famous for their book This Time is Different: Eight Centuries of Financial Folly and their earlier paper This Time is Different: A Panoramic View of Eight Centuries of Financial Crises. Their point, of course, is that the same thing happens over and over again. We can learn from past crises to solve our current problems.

Part of their story is of course correct. Governments have gotten themselves into problems with debt, time after time. This is happening again now. In fact, the same two authors recently prepared a working paper for the International Monetary Fund called Financial and Sovereign Debt Crises: Some Lessons Learned and Some Lessons Forgotten, talking about ideas such as governments inflating their way out of debt problems and pushing problems off to insurance companies and pension funds, through regulations requiring investment in certain securities.

Many seem to believe that if we worked our way out of debt problems in the past, we can do the same thing again. The same assets may have new owners, but everything will work together in the long run. Businesses will continue operating, and people will continue to have jobs. We may have to adjust monetary policy, or perhaps regulation of financial institutions, but that is about all.

I think this is where the story goes wrong. The situation we have now is very different, and far worse, than what happened in the past. We live in a much more tightly networked economy. This time, our problems are tied to the need for cheap, high quality energy products. The comfort we get from everything eventually working out in the past is false comfort.

If we look closely at the past, we see that in some cases the outcomes are not benign. There are situations where much of the population in an area died off. This die-off did not occur directly because of debt defaults. Instead, the same issues that gave rise to debt defaults, primarily diminishing returns with respect to food and other types of production, also led to die off. We are not necessarily exempt from these same kinds of problems in the future.

Why the Current Interest in Debt Levels and Interest Rates

The reason I bring up these issues is because the problem of too much world debt is now coming to the forefront. The Bank for International Settlements, which is the central bank for central banks, issued a report a week ago in which they said world debt levels are too high, and that continuing the current low interest rate policy has too many bad effects. Something needs to be done to normalize monetary policy.

Janet Yellen, Federal Reserve Chair, and Christine Lagarde, managing director or the International Monetary Fund, have also been making statements about the issue of how to fix our current economic problems (News Report; Video). There is the additional rather bizarre point that back in January, Lagarde used numerology to suggest that a major change in policy might be announced in 2014 (on July 20?), with the hope that the past “seven miserable years” can be followed by “seven strong years.” The IMF has talked in the past about using its special drawing rights (SDRs) as a sort of international currency. In this role, the SDRs could act as the world’s reserve currency, be used for issuing bonds, and be used for setting the prices of commodities such as gold and oil. Perhaps a variation on SDRs is what Lagarde has in mind.

So with this background, let’s get back to the main point of the post. How is this debt crisis, and the likely outcome, different from previous crises?

1. We live in a globalized economy. Any slip-up of a major economy would very much affect all of the other major economies.

Banks hold bonds of governments other than their own. If a major government fails to make good on its promises, it can affect other governments as well. Smaller countries, like Greece or Cyprus, can be bailed out or their problems worked around. But if the United States, or even Japan, should run into major difficulties, it would affect the world as a whole. See my post, Twelve Reasons Why Globalization is a Huge Problem.

2. Our problem now is not simply governmental debt; it is debt of many different types, affecting individuals and businesses of all kinds, as well as governments.

In the studies of historical debt by Reinhart and Rogoff, the focus is on governmental debt. Now there is much more debt, some through banks, some through bonds, and some through less traditional sources. There are also derivatives that are in some ways like debt. In particular, if there are sharp moves in interest rates, it is possible that some issuers of derivatives will find themselves in financial difficulty.

There are also promises that are in many ways like debt, but that technically aren’t guaranteed, because legislatures can change the promised benefits whenever they choose. Examples of these are our current Social Security program and Medicare benefits. Citizens depend on these programs, even if there is no promise that they will continue to exist in their current form. With all of these kinds of debt and quasi-debt, we have a much more complex situation than in the past.

3. Our economy is a self-organized system that has properties of its own, quite apart from the properties of the individual consumers, businesses, governments, and resources that make up the system. Circumstances now are such that the world economy could fail, even though this could not happen in the past.  

I recently wrote about the nature of a networked economy, in my post Why Standard Economic Models Don’t Work–Our Economy is a Network. In that post, I represented our networked economy as being somewhat like this dome that can be built with wooden sticks.

Figure 1. Dome constructed using Leonardo Sticks

Years ago, when a civilization collapsed, the network of connections was not as dense as it is today. Most food was not dependent on long supply chains, and quite a bit of manufacturing was done locally. If one economy collapsed, even a fairly large one like the Weimar Republic of Germany, the rest of the world was not terribly dependent on it. Figuratively, the “hole” in the dome could mend, and over time, the economy could strengthen and go on as before. We cannot count on this situation today, however.

4. Fossil fuels (coal, oil and natural gas) available today are what enable tighter connections than in the past, and also add vulnerabilities.

Early economies relied mainly on the sun’s energy to grow food, gravity to help with irrigation, human energy and animal energy for transport and food growing, wind energy to power ships and wooden windmills, and water energy to operate water wheels. Wood was used for many purposes, including heating homes, cooking, and making charcoal to provide the heat needed to smelt metals and make glass.

In the past two hundred years we have added fossil fuels to our list of fuels. This has allowed us to make metals in quantity, as well as concrete and glass in quantity, enabling the development of much technology. The use of coal enabled the building of hydroelectric dams as well as electrical transmission lines, thus enabling widespread use of electricity. Fossil fuels enabled other modern fuels as well, including nuclear energy, and the manufacture of what we today call “renewable energy,” including today’s wind turbines and solar PV.

Of the fossil fuels, oil has been especially important. Oil is particularly good as a transport fuel, because it is easily transported and very energy dense. With the use of oil, transport by smaller vehicles such as cars, trucks and airplanes became possible, and transport by ship and by rail was improved. Such changes allowed international businesses to grow and international trade to flourish. Economies were able to grow much more rapidly than in the pre-fossil fuel era. Governments became richer and began offering education to all, paved roads, and benefits such as unemployment insurance, health care programs, and pensions for the elderly.

Thus, fossil fuels enable a very different lifestyle, and very different governments and government programs than existed prior to fossil fuels. If something were to happen to all fossil fuels, or even just oil, most businesses would have to cease operation. Governments could not collect enough taxes to continue functioning. Very few farmers would be able to produce food and transport it to market, because oil is used to transport seeds to farmers, to operate machinery, to operate irritation equipment, to transport soil amendments, and to create herbicides and pesticides.

This situation now is very different from the past, when most food was produced using human and animal labor, and transport was often by a cart pulled by an animal. Before fossil fuels, even if governments collapsed and most people died off, the remaining people could continue growing food, gathering water, and going about their own lives. If we were to lose oil, or oil plus electricity (because oil is required to maintain electric transmission and because businesses tend to close when they are missing either oil or electricity), we would have a much harder time. Most of our jobs would disappear. Banks wouldn’t be able to operate. Our water and sewer systems would stop working. We would find it necessary to “start over,” in a very different way.

5. Because of the big role of debt today, economic growth is essential to keeping the current economic system operating. 

It is much easier to pay back debt with interest when an economy is growing than when it is shrinking, because when an economy is shrinking, people are losing their jobs. Even if only, say, 10% lose their jobs, this loss of jobs creates many loan defaults. Banks are likely to find themselves in a precarious position and are likely to cut back on lending to others, making the situation worse.

If the economy starts shrinking, businesses will also have difficulty. They have fixed costs, including rent, management salaries, and their own debt repayments. These costs tend to stay the same, even if total revenue shrinks because of an economic slowdown. Because of these problems, businesses are also likely to find it increasingly difficult to pay back their own debt in a recession. They are likely to find it necessary to lay off workers, making the recession worse.

If economic growth is very low, this lack of growth can to some extent be covered up with very low interest rates. But such very low interest rates tend to be a problem as well, because they encourage asset bubbles of many sorts, such as the current run-up in stock market prices. It is not always clear which bubbles are being run up by low interest rates, either. For example, it is quite possible that the recent run-up in US oil extraction (see Figure 4, below) is being enabled by ultra-low interest rates debt (since this is a cash-flow negative business) and by investors who a desperate for an investment that might yield a slightly higher yield than current low bond yields.

Actually, the current need for growth to prevent defaults is not all that different from the situation in the past 800 years. In Reinhardt and Rogoff’s academic paper mentioned above, the authors remark, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.” Reinhardt and Rogoff didn’t seem to understand why this occurred, however.

6. The underlying reason regarding why we are headed toward debt problems is different from in the past. We now are dependent both on oil products and electricity, two very concentrated carriers of energy, instead of the more diffuse energy types used in the past. Our problem is that these energy carriers are becoming high-cost to produce. It is these high costs (a reflection of diminishing returns) that lead to economic contraction. 

This time, in order to continue economic growth, we need a growing supply of very high-quality energy products, namely oil products and non-intermittent electricity, to support the economy that we have built. These products need to be low-priced, if customers are to afford them. Thus, it should not be surprising that economic growth in the past seems to have been driven by a combination of (1) falling prices of electricity as we learned to more efficiently produce it, and (2) continued low prices for oil.

Figure 2.  Electricity prices and electrical demand, USA 1900 - 1998 from Ayres Warr paper.

According to Ayres and Warr (Figure 2), power stations in 1900 converted only 4% of the potential energy in coal to electricity, but by 2000, the conversion efficiency was raised to 35%. This improvement in efficiency allowed the continuing decrease in electricity prices. With lower prices, more individuals and businesses were able to afford electricity, and more technology using electricity became feasible. Cheap electricity allowed goods to be produced at prices that workers could afford, and the system tended to grow.

For oil, the price of oil remained relatively flat in inflation-adjusted terms for a very long time, even as engineers developed ever-more-efficient devices to use that oil.

Figure 3. Historical oil prices in 2012 dollars, based on BP Statistical Review of World Energy 2013 data. (2013 included as well, from EIA data.)

We ran into our initial problems extracting oil cheaply in the early 1970s, after US oil production started to decline (Figure 4).

Figure 4. US crude oil production split between tight oil (from shale formations), Alaska, and all other, based on EIA data. Shale is from  AEO 2014 Early Release Overview.

Back in the 1970s, we were able to work around the price spike by bringing oil production online in several additional places, including the Alaska, the North Sea, and Mexico. Unfortunately, those areas are now declining as well. Thus, we are increasingly forced to extract oil from areas that are high priced either (a) because of  high extraction costs (such as the tight oil now being extracted in the United States) or (b) because of high indirect costs (such as the need for desalination plants and food subsidies in the Middle East). These can only be funded if oil prices are high, allowing governments to collect high levels of taxes.

There is considerable evidence that high oil prices are associated with recession. The Great Recession of 2007-2009 was associated with a huge spike in oil prices. I have written about the way high oil prices contribute to recession in a peer-reviewed article published in the journal Energy called Oil Supply Limits and the Continuing Financial Crisis. James Hamilton has shown that has shown that 10 out of 11 US recessions since World War II were associated with oil price spikes. Hamilton also showed that the effects of the oil price spike were sufficient to cause the recession of that began in late 2007.

Now the cost of oil production is high, and electricity prices have stopped falling. We read U. S. electricity prices may be going up for good, from the L. A. Times. It should be no surprise that economic growth is now a problem.

7. In historical periods, defaults were mostly associated with the transfer of ownership of various productive assets (such as land and factories) from one owner to another. Now, we are vulnerable to changes that could ultimately cut off oil and electricity, and thus bring the system down–not just transfer ownership. 

The kinds of things that could bring the system down are diverse. They include:

  • War in the Middle East that would vastly disrupt oil exports. We do not have alternative suppliers–the world would have to do without part of its supplies. We are vulnerable now, because oil exporters are getting “squeezed” by prices that have not risen substantially since 2011. This makes it harder for Middle Eastern countries to fund their budgets, making wars and civil disorder more likely.
  • A spike in oil prices, perhaps caused by a war in the Middle East, that would vastly disrupt oil exports. Oil importing countries would head back into recession, with many layoffs. Governments are in worse shape for fighting this situation than they were in 2007-2008.
  • An increase in interest rates. While Quantitative Easing and Zero Interest rate policy may not look like they are doing much, an increase in interest rates would not work well at all. With higher interest rates, governments would owe more in interest payments, so would need to raise taxes (leading to recessionary effects). The monthly payments required for buying high-priced goods (from cars, to houses, to factories) would rise, cutting back on demand, also tending to lead to recession.
  • A decrease in lending, or even a failure of debt to keep rising, would also be a problem. Janet Yellen’s recent IMF speech highlighted the possibility of using regulation to prevent excessive debt. Unfortunately, increasing debt is very much needed to keep oil prices high enough to enable extraction at today’s high cost levels. See my post The Connection Between Oil Prices, Debt Levels, and Interest Rates. If debt levels drop, we run the danger of oil prices dropping as dramatically as they did in late 2008, when lending froze up.

Figure 5. Oil price based on EIA data with oval pointing out the drop in oil prices, with a drop in credit outstanding.

8. The world is now filled with a large number of people in powerful positions who mistakenly think they know answers to questions, when they really do not. The problem is that researchers tend operate in subject-matter “silos.” They build models based on their narrow understanding of a problem. These models may temporarily work, but as we reach limits in a finite world, these models produce misleading results. The users of these models do not understand the problem and make decisions based on badly flawed models.

Economists do not understand energy issues. They seem to think that their models, which ignore energy issues, are fine. All they need to do is fine-tune regulation, or tweak interest rates, and everything will be fine. Unfortunately, these economic models no longer work, as I explained in a recent post, Why Standard Economic Models Don’t Work–Our Economy is a Network.

In fact, the issue is more basic than just bad models that economists are using. The whole “peer-reviewed paper” system, with its pressure to write more peer-reviewed papers, each resting on prior peer-reviewed papers, is flawed. Models are built and used endlessly, in part because that is the way things have been done in the past. Once an approach is used frequently, everyone assumes it is correct. Models can and do have short term-predictive power, but that fact does not mean that the approach works for the long term.

The problem we are running into is the fact the world is finite. Growth can’t continue indefinitely. The way that the physical world enforces the end to growth is not obvious, until we start hitting the limits. The limits are cost of production limits for oil and for our supply of stable grid electricity. (I have talked about selling prices, but selling prices are not really the limits, in themselves. It is the fact that with higher costs of production, either selling prices must go up, or profits and the ability to invest in new production must go down–that is the problem. Right now, the rising cost of production of oil is being hidden in prices that are too low for oil producers. So many assume we don’t have a problem. The issue of adequate government funding is also mixed into the price/cost of production issue.)

Models that are no longer correct fill every area of study, from actuarial models, to financial planning models, to economic models, to models forecasting future oil and gas production, to climate change models.

Some models are deceptively simple–the idea that the number of years of future production of oil (or gas or coal) can be estimated by [Amount of Resources / Current Annual Production] is a simple model. Unfortunately, this model doesn’t work, because we can never get enough investment capital to extract all of the fossil fuel that seems to be available–the price can never go high enough, and stay high enough. High prices simply bring on recession. See my post, IEA Investment Report – What is Right; What is Wrong.

In fact, it is pretty hard to find any model that continues to work, as we reach limits in a finite world. This is not intuitively obvious. If a model worked before, why wouldn’t it work now? Researchers and well-meaning leaders follow models that sort of worked in the past, but don’t really model the current situation. Thus, we have well-meaning leaders, doing their best to make things better, inadvertently making things worse. In a finite world, everything is “connected” to everything else, so things that look beneficial from one perspective can have a bad outcome viewed another way. For example, a reduction in carbon dioxide emissions from closing coal plants risks major electrical outages is New England and seems likely to raise electricity prices. Such changes push the economy toward recession, and perhaps ultimately toward collapse.

Governments are one area squeezed by higher oil and electricity costs. As governments cut back, whether these cut backs are in education, unemployment benefits, military spending, or healthcare spending, there are indirect effects on the economy as a whole. The problem is that government spending creates jobs. As government spending is cut, it pushes the economy toward contraction–even if part of today’s spending is clearly wasteful. It creates a conundrum–fixing one problem makes another problem worse.

Conclusion

We live in perilous times. We have leaders who think they know the answers but, in fact, they do not. The debt problems we face now are not just overspending problems; they are signs that we are reaching limits of a finite world. World leaders do not seem to understand this connection. It is not even clear that they understand the connection of debt problems to the need for cheap-to-produce, high-quality energy products.

World leaders are nevertheless convinced that they know the answers, based on complex, but very flawed, models. Unfortunately, actions taken based on these models have a good chance of making the situation worse rather than better. For example, trying to tie a world economy closer together, when it is already heading toward collapse, seems like a recipe for disaster.

I find Christine Lagarde’s use of numerology in her January 14, 2014 speech at the National Press Club Luncheon disturbing. Is she trying to signal some “in crowd” to make different decisions, in advance of a big IMF announcement? Or is numerology being used for prediction? Such an approach to forecasting would seem to be even worse than using models based on silos of limited understanding.

Ukraine and the Battle for South Stream

Off the keyboard of Tony Cartalucci

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Published on Land Destroyer on June 27, 2014

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June 27, 2014 (Tony Cartalucci – NEO) – The ongoing conflict in Ukraine, admittedly an attempt to expand both NATO and the European Union (EU),  has escalated in terms of dominating Europe’s energy markets. Attempts to halt the ongoing construction of Russia’s South Stream natural gas pipeline appears to be a direct attempt to further penalize Russia for its role in defending Ukrainians currently under siege by aircraft, artillery, heavy armor and irregular troops.Toward a Europe “Whole and Free,” and its Energy Market Too 

“Toward a Europe Whole and Free” was literally the title of NATO’s Atlantic Council’s May 2014 event celebrating NATO’s continuous expansion since the fall of the Soviet Union and its aspirations to integrate all along Russia’s borders and even Russia itself into its geopolitical socioeconomic order. The Atlantic Council’s official program webpage for the event stated:

This two-day conference will honor the historic milestones that have forged a strong and prosperous Atlantic community and explore the most pressing challenges to the completion of a Europe whole and free. This vision, successfully implemented for two decades with a bipartisan and transatlantic strategy, has been called into question both within current NATO and EU members and by Russia’s aggressive actions. Leaders and experts will gather at the Council’s headquarters to debate the opportunities and challenges in Europe’s east and south with the aim of exploring a renewed common transatlantic approach.

What is essentially a celebration of expansionism, military aggression, and extraterritorial political subversion, the event featured many of the chief protagonists in Ukraine’s current crisis. These included US Secretary of State John Kerry and US Vice President Joseph Biden, along with NATO commanders and US corporate-financier funded policymakers who have authored America’s decades of “exceptionalism.” It also included US Senator John McCain who literally flew to Kiev during the height of the “Euromaidan” protests and took the stage with ultra-right Neo-Nazi Svoboda Party leaders.
In their own words, those attending the Atlantic Council gathering describe the battle for Ukraine being fought to “complete” their socioeconomic consolidation in Europe – this includes “integrating Russia.” Secretary John Kerry at the gathering would literally state:

Our European Allies have spent more than 20 years with us working to integrate Russia into the Euro-Atlantic community.

By “integrating” Russia, of course, Kerry means overthrowing any independent national political order that exists in Moscow and replacing it with one that answers to Wall Street, London, and now Brussels. This can be seen clearly in attempts by the West to replicate its model of “color revolution” within Russian territory itself.


But Kerry and the rest of EU-NATO, recognizing that efforts to subvert and overthrow an independent political order in Russia have failed, have resorted to a policy of encirclement, containment, and confrontation, with Ukraine being only one of many battlefields the West is fighting upon. Kerry would declare Europe’s energy market as another.

He stated (emphasis added):

“…if we want a Europe that is both whole and free, then we have to do more together immediately, with a sense of urgency, to ensure that European nations are not dependent on Russia for the majority of their energy. In this age of new energy markets, in this age of concern about global climate change and carbon overload, we ought to be able to rush to the ability to be able to make Europe less dependent. And if we do that, that will be one of the greatest single strategic differences that could be made here. We can deliver greater energy independence and help to diversify energy sources that are available to the European markets, and we can expand the energy infrastructure across Europe, and we can build up energy storage capacity throughout the continent.”

And immediately they did. After resisting pressure from the EU regarding Russia’s South Stream pipeline, Bulgaria has been forced to suspend ongoing construction, jeopardizing interests and opportunities not only for Russia, but for the nations the pipeline is to pass through.

The Battle for South Stream 

The halting of construction followed a visit by US Senators John McCain, Christopher Murphy, and Ron Johnson – with McCain in particular directly supporting the armed overthrow of the Ukrainian government earlier this year. In a Washington Post article titled, “Bulgaria halts work on South Stream gas pipeline,” it states:

Bulgaria’s prime minister has ordered on Sunday a halt to construction work on the Gazprom-led South Stream pipeline project planned to bypass Ukraine as a transit country and consolidating Russia’s energy grip in Europe.

Plamen Oresharski said after meeting U.S. Sens. John McCain, Christopher Murphy and Ron Johnson that he has ordered all work on the disputed project to continue only after consultations with Brussels.

Moscow responded by pointing out the obvious nature of what are in all intents and purposes sanctions against Russia. The Moscow Times reported in an article titled, “Russia Sees Underhanded Sanctions in Bulgaria’s Suspension of South Stream,” that:

Bulgaria’s decision to suspend construction of the Russia-led South Stream pipeline project on its territory, undermining Russia’s efforts to diversify its gas transportation infrastructure to Europe away from Ukraine, is an underhanded economic sanction thrust on Russia by the West, a top Russian diplomat and Russian industry analysts said Monday.

The article would also point out that once the South Stream pipeline is completed it will diminish Ukraine’s importance as a transit point for Russian natural gas into Western Europe. It appears that the moves against South Stream are designed to at the very least, delay this inevitable outcome for as long as possible, to maintain leverage as the West struggles to consolidate power on behalf of their teetering proxy regime in Kiev.

For Bulgaria’s part, not only have they disregarded US sanctions on Russia, choosing a Russian firm to build the pipeline, they appear eager to resolve the legal obstacles conveniently laid down amid the ongoing Ukrainian crisis, and complete the pipeline as soon as possible.

Exploiting South Stream’s Delay 

The West’s plans to use South Stream’s delay to extort concessions from Russia and those working with it on the project. Additionally the delay will help preserve the benefits of Ukraine’s current monopoly on transporting Russian natural gas to Western Europe. To ensure maximum leverage, the West is placing key personnel within Ukraine’s energy sector, in addition to propping up the regime in Kiev. Perhaps the most indicative of the overall illegitimacy and criminal nature of the current EU-NATO posture was the appointment of Hunter Biden, son of US Vice President Joseph Biden, as a member of Ukraine energy giant Barisma’s board of directors.

Biden Jr.’s nepotist appointment is not where the conflict of interest begins or ends. Biden Jr. was also a director of the US State Department’s National Endowment for Democracy (NED) subsidiary National Democratic Institute (NDI). The NED/NDI played an admitted role in building up opposition parties in Ukraine prior to the so-called “Euromaidan” protests and admittedly engineered the so-called “Orange Revolution” in Ukraine in 2004. More recently, they served as “election monitors” lending their stamp of approval of polling in Ukraine where entire provinces failed to vote in the east, opposition parties were unable to campaign in the west, and the aerial bombardment of cities across the country was underway.

In effect, Biden Jr.s NDI overthrew a government ahead of himself being appointed as a director in the targeted nation’s largest energy company – a dizzying conflict of interest. Coupled with the stated US agenda of reducing Russia’s influence in Europe’s energy market, this conflict of interest becomes a self-evident impropriety and an obvious component of the West’s agenda of encircling and containing Russia.

It remains to be seen how long the South Stream delay lasts and what other moves the EU, NATO, and Ukraine’s openly foreign-influenced regime and industries take in implementing Secretary Kerry’s stated goal of confronting Russia. For nations like Bulgaria, the cost to their sovereignty upon entering the European Union can now be acutely felt. Bulgaria is now unable to pursue their own interests because of dictates from Brussels made on behalf of special interests operating well beyond their borders and in aboslute disregard to the peace and prosperity of the Bulgarian people. It is a cautionary tale for other nations around the world seeking to enter into similar supranational “communities,” most notably Southeast Asia’s ASEAN/AEC.

NATO and the EU’s open intent to “integrate” all of Europe including Russia into their geopolitical order, clearly by force if necessary, their abuse of the EU’s legal framework to impose thinly veiled sanctions on Russia, overt nepotism, as well as obstructing the completion of projects that are demonstrably beneficial to their own member states reveals an emerging political order of immense criminality unbound by the rule of law and a clear and present danger to global stability. For those in eastern Ukraine weathering air raids, artillery barrages, and mechanized “national guard” composed of ultra-right Neo-Nazi militants, that instability is already a deadly, daily reality.

Tony Cartalucci, Bangkok-based geopolitical researcher and writer, especially for the online magazine New Eastern Outlook”.

Natural Gas: Flaming Out?

From the keyboard of Thomas Lewis
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Seen from above, natural gas being flared at night bears a remarkable resemblance to the ill-fated Hindenburg. (Photo by Phudpucker.com)

Seen from above, natural gas being flared at night bears a remarkable resemblance to the ill-fated Hindenburg. (Photo by Phudpucker.com)

First published at The Daily Impact  June 11, 2014

 

A little known crisis is approaching in the world of natural gas, one that threatens the most successful part of the largely imaginary New American Bonanza (NAB) in oil and gas brought on by hydraulic fracking. The gas frackers did manage to increase domestic supplies, so much so that two things happened: every electric generator that could switch from coal to gas, did so; while the glut drove the price down so far that the gas producers started losing money. Their output, which had grown by seven percent in 2011 and five percent in 2012, managed to inch up one percentage point last year. Now the entire industry has an iceberg just off the starboard bow.

There isn’t enough natural gas in the system to get us through a winter. The marketers have been too good at selling gas furnaces — they now heat half of our homes. So for years now the industry has during the milder months stockpiled four trillion cubic feet of gas in underground caverns. And in a typical winter, the industry draws down two trillion square feet to meet demand. Last winter, it took over three trillion. If that gas is not replaced in the reserves, and the winter is anywhere near as cold as the last one, people could be facing not just high prices, but insufficient supplies.

The bad news is that efforts to refill the caverns are running well behind the required pace, in part because natural gas is used for refrigeration and air conditioning, too, and demand is running very high. The good news is that gas prices are rising (no, wait, isn’t that the bad news?) and that is causing power companies to start switching back to coal (you call that good news?), thus easing demand.

One unanswered question is whether the fracking companies, even given the gift of rising prices, will be able to respond with increased production. The hideous depletion rates of fracking wells means they have to be replaced at least every four years, more often than that if one wants to maintain or increase production volumes. The strains of trying to maintain the illusion of the NAB in the face of hard realities has left the players virtually broke and heavily in debt. Chesapeake Energy, the biggest player in the Marcellus Shale of West Virginia, Pennsylvania and New York, has been shedding wells and leases like a molting chicken sheds feathers. Last year, only 23 percent of its revenue came from selling gas. In desperation, it has been finding ways to cut payments to the owners of land it has already drilled, in some cases by 90 percent.

More and more this industry resembles the legendary retailer whose business plan was to sell shoes for a dollar a pair less than he paid for them, making up for the loss with “volume.” Then there’s the shortage of shoes. It was once claimed that the Marcellus (the only gas-fracking play in the country that has not yet peaked) contains 410 trillion cubic feet of recoverable gas. The emerging consensus is more like 50 trillion. To quote the governor of Texas: “Whoops.”

Now if this sick puppy of an industry fails to meet demand this winter, people will suffer and die, and the loss of faith will be complete. If the winter is mild and nothing bad happens, which seems likely in a year of El Nino, will we all continue to sing Happy and skip toward the edge of the cliff?

That would be the bad news.

 

***

 

Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.

 

 

The Absurdity of US Natural Gas Exports

Off the keyboard of Gail Tverberg

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Published on Our Finite World on March 31, 2014

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Discuss this article at the Energy Table inside the Diner

Quiz:

1. How much natural gas is the United States currently extracting?

(a) Barely enough to meet its own needs
(b) Enough to allow lots of exports
(c) Enough to allow a bit of exports
(d) The United States is a natural gas importer

Answer: (d) The United States is a natural gas importer, and has been for many years. The EIA is forecasting that by 2017, we will finally be able to meet our own natural gas needs.

Figure 1. US Natural Gas recent history and forecast, based on EIA's Annual Energy Outlook 2014 Early Release Overview

Figure 1. US Natural Gas recent history and forecast, based on EIA’s Annual Energy Outlook 2014 Early Release Overview

In fact, this last year, with a cold winter, we have had a problem with excessively drawing down amounts in storage.

Figure 2. US EIA's chart showing natural gas in storage, compared to the five year average, from Weekly Natural Gas Storage Report.

Figure 2. US EIA’s chart showing natural gas in storage, compared to the five year average, from Weekly Natural Gas Storage Report.

There is even discussion that at the low level in storage and current rates of production, it may not be possible to fully replace the natural gas in storage before next fall.

2. How much natural gas is the United States talking about exporting?

(a) A tiny amount, less than 5% of what it is currently producing.
(b) About 20% of what it is currently producing.
(c) About 40% of what it is currently producing.
(d) Over 60% of what it is currently producing.

The correct answer is (d) Over 60% what it is currently producing. If we look at the applications for natural gas exports found on the Energy.Gov website, we find that applications for exports total 42 billion cubic feet a day, most of which has already been approved.* This compares to US 2013 natural gas production of 67 billion cubic feet a day. In fact, if companies applying for exports build the facilities in, say, 3 years, and little additional natural gas production is ramped up, we could be left with less than half of current natural gas production for our own use.

*This is my calculation of the sum, equal to 38.51 billion cubic feet a day for Free Trade Association applications (and combined applications), and 3.25 for Non-Free Trade applications.

3. How much are the United States’ own natural gas needs projected to grow by 2030?

a. No growth
b. 12%
c. 50%
d. 150%

If we believe the US Energy Information Administration, US natural gas needs are expected to grow by only 12% between 2013 and 2030 (answer (b)). By 2040, natural gas consumption is expected to be 23% higher than in 2013. This is a little surprising for several reasons. For one, we are talking about scaling back coal use for making electricity, and we use almost as much coal as natural gas. Natural gas is an alternative to coal for this purpose.

Furthermore, the EIA expects US oil production to start dropping by 2020 (Figure 3, below), so logically we might want to use natural gas as a transportation fuel too.

Figure 3. US Annual Energy Outlook 2014 Early Release Oil Forecast for the United States.

Figure 3. US Annual Energy Outlook 2014 Early Release Oil Forecast for the United States.

We currently use more oil than natural gas, so this change could in theory lead to a 100% or more increase in natural gas use.

Many nuclear plants we now have in service will need to be replaced in the next 20 years. If we substitute natural gas in this area as well, it would further send US natural gas usage up. So the EIA’s forecast of US natural gas needs definitely seem on the “light” side.

4. How does natural gas’s production growth fit in with the growth of other US fuels according to the EIA?

(a) Natural gas is the only fuel showing much growth
(b) Renewables grow by a lot more than natural gas
(c) All fuels are growing

The answer is (a). Natural gas is the only fuel showing much growth in production between now and 2040.

Figure 4 below shows the EIA’s figure from its Annual Energy Outlook 2014 Early Release showing expected production of all types of fuels.

Figure 4. Forecast US Energy Production by source, from US EIA's Annual Energy Outlook 2014 Early Release.

Figure 4. Forecast US Energy Production by source, from US EIA’s Annual Energy Outlook 2014 Early Release.

Natural gas is pretty much the only growth area, growing from 31% of total energy production in 2012 to 38% of total US energy production in 2040. Renewables are expected to grow from 11% to 12% of total US energy production (probably because the majority is hydroelectric, and this doesn’t grow much). All of the others fuels, including oil, are expected to shrink as percentages of total energy production between 2012 and 2040.

5. What is the projected path of natural gas prices:

(a) Growing slowly
(b) Ramping up quickly
(c) It depends on who you ask

It depends on who you ask: Answer (c). According to the EIA, natural gas prices are expected to remain quite low. The EIA provides a forecast of natural gas prices for electricity producers, from which we can estimate expected wellhead prices (Figure 5).

Figure 5. EIA Forecast of Natural Gas prices for electricity use from AEO 2014 Advance Release, together with my forecast of corresponding wellhead prices. (2011 and 2012 are actual amounts, not forecasts.)

Figure 5. EIA Forecast of Natural Gas prices for electricity use from AEO 2014 Advance Release, together with my forecast of corresponding wellhead prices. (2011 and 2012 are actual amounts, not forecasts.)

In this forecast, wellhead prices remain below $5.00 until 2028. Electricity companies look at these low price forecasts and assume that they should plan on ramping up electricity production from natural gas.

The catch–and the reason for all of the natural gas exports–is that most shale gas producers cannot produce natural gas at recent price levels. They need much higher price levels in order to make money on natural gas. We see one article after another on this subject: From Oil and Gas Journal; from Bloomberg; from the Financial Times. The Wall Street Journal quoted Exxon’s Rex Tillerson as saying, “We are all losing our shirts today. We’re making no money. It’s all in the red.”

Why all of the natural gas exports, if we don’t have very much natural gas, and the shale gas portion (which is the only portion with much potential for growth) is so unprofitable? The reason for all of the exports is too pump up the prices shale gas producers can get for their gas. This comes partly by engineering higher US prices (by shipping an excessive portion overseas) and partly by trying to take advantage of higher prices in Europe and Japan.

Figure 6. Comparison of natural gas prices based on World Bank "Pink Sheet" data. Also includes Pink Sheet world oil price on similar basis.

Figure 6. Comparison of natural gas prices based on World Bank “Pink Sheet” data. Also includes Pink Sheet world oil price on similar basis.

There are several catches in all of this. Dumping huge amounts of natural gas on world export markets is likely to sink the selling price of natural gas overseas, just as dumping shale gas on US markets sank US natural gas prices here (and misled some people, by making it look as if shale gas production is cheap). The amount of natural gas export capacity that is in the approval process is huge: 42 billion cubic feet per day. The European Union imports only about 30 billion cubic feet a day from all sources. This amount hasn’t increased since 2005, even though EU natural gas production has dropped. Japan’s imports amounted to 12 billion cubic feet of natural gas a day in 2012; China’s amounted to about 4 billion cubic feet. So in theory, if we try hard enough, there might be a place for the 42 billion cubic feet per day of natural gas to go–but it would take a huge amount of effort.

There are other issues involved, as well. The countries that are importing huge amounts of high-priced natural gas are not doing well financially. They aren’t going to be able to afford to import a whole lot more high-priced natural gas. In fact, a big part of the reason that they are not doing well financially is because they are paying so much for imported natural gas (and oil).

If the US has to pay these high prices for natural gas (even if we produce it ourselves), we won’t be doing very well financially either. In particular, companies who manufacture goods with electricity from high-priced natural gas will find that the goods they make are not competitive with goods made with cheaper fuels (coal, nuclear, or hydroelectric) in the world marketplace. This is a problem, whether the country produces the high-priced natural gas itself or imports it. So the issue is not an imported fuel problem; it is a high-priced fuel problem.

Another issue is that with shale gas, we are the high cost producer. There is a lot of natural gas production around the world, particularly in the Middle East, that is cheaper. If we add our high cost of shale gas to the high cost of shipping LNG long-distance across the Atlantic or Pacific, we will most definitely be the high cost producer. Other producers with lower costs (even local shale gas producers) can undercut our prices. So at best those shipping LNG overseas are likely to make mediocre profits.

And there would seem to be great temptation to stir up trouble, to encourage Europe to buy our natural gas exports, rather than Russia’s. Of course, our ability to provide this natural gas is not entirely clear. It makes a good story, with lots of “ifs” involved: “If we can really extract this natural gas. If the price can really go up and stay up. If you can wait long enough.” The story makes the US look more rich and powerful than it really is. We can even pretend to offer help to the Ukraine.

Perhaps the best outcome would be if virtually none of this natural gas export capacity ever gets built–approval or no approval. If it is really possible to get the natural gas out, we need it here instead. Or leave it in the ground.

Reasons for our Energy Predicament – An Overview

Off the keyboard of Gail Tverberg

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Published on Our Finite World on March 4, 2014

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Discuss this article at the Energy Table inside the Diner

Quiz: What will cause world oil supply to fall?

  1. Too little oil in the ground
  2. Oil prices are too low for oil producers
  3. Oil prices are too high for oil consumers leading to recession, debt defaults, and ultimately a cut back in credit availability and very low oil prices
  4. Oil exporters are subject to civil unrest and overthrow of governments, due to low prices and/or depleting reserves
  5. Lack of money (and physical resources that might be purchased with this money) to pull oil out of the ground.
  6. Pollution related issues–too much smog in China; too many problems with fracking; too many problems with CO2.
  7. The financial current system fails, and can only be replaced by one that allows much less debt. Oil prices remain too low under such a system.

In my view, any answer other that the first one is likely to be at least partially right. Ultimately, the issue is that to extract oil or any fossil fuel, we have to keep the financial and political systems together. These systems can be expected to fail, far before we run out of oil in the ground. Most oil in the ground (as well as most other fossil fuels in the ground) will be left in the ground, in my view.

Basing estimates of future oil production on oil reserves is likely to give far too high an indication with respect to actual future production. Even more absurd numbers come from using “resource” numbers (which are higher than reserve numbers) to make estimates of future oil production. Coal and natural gas production is likely to fall at exactly the same time as oil, because the problems are likely to be financial and political ones, not “resources in the ground” problems.

Direct Application of M. King Hubbert Theory is Incorrect

M. King Hubbert is known for his estimates of future oil production  (195619621976) based on reserve amounts. There are two things of importance to notice about his estimates:

(a) The oil reserve estimates used are of free flowing oil reserves of the type that geologists currently were looking at. Thus, they were restricted to “cheap to extract” reserves, and

(b) When Hubbert showed graphs of world oil production following a generally symmetric curve (so downslope looks like a mirror image of upslope), Hubbert showed some other source of energy supply (nuclear in his early papers, solar in later ones) rising to high levels, before world oil production ever dropped. He even talked about making liquid fuels using a huge amount of energy plus carbon dioxide and water–in other words, reversing combustion (1962). In order to ramp nuclear or solar up to these very high levels, they would need to be  extremely cheap.

The assumptions that M. King Hubbert makes are effectively ones that would allow the economy to continue to grow and the financial system to “hang together.” If a person looks at today’s situation, it is quite different. We do not have an alternate fuel supply that will  allow the economy to continue to grow, regardless of fossil fuel consumption. The published reserves include large amounts of oil in the ground that are not of the very cheap to extract type. Extracting such oil will be impossible if oil prices are very low, or if credit availability is lacking. It is tempting for observers to look at oil reserves and assume that all is well, but this is definitely not the case.

 

Basic issue: Future oil extraction and future substitution is uncertain 

One basic issue is the “iffiness” of the reported reserve and resource amounts:

There is lots of oil in the ground, if we can actually get it out. Getting it out requires a combination of a financial system that allows us to do this (high enough prices for producers, adequate credit availability for producers, equity investment available if credit is not available, buyers who can afford the products) and political system that allows this to happen (citizens in countries with oil extraction not rioting for lack of food; banks open in countries trying to import oil; adequate trade connections among countries).

Likewise, substitution is possible among energy products, if it is possible to overcome the many hurdles involved in doing this. There are two cost hurdles: the higher ongoing cost of the substitute and the transition cost. The transition cost gets to be very high if there are a lot of “sunk costs” that are lost–for example, if citizens  are forced to quickly change from gasoline powered cars to electric cars, so that the resale value of their gasoline powered cars drops precipitously. There is also a technology hurdle: we need to have the technology to enable using the different energy source.

If the cost of the substitute is higher than the cost of the original energy source, a change to the substitute will tend to make the economy shrink, because wages will “go less far”. If citizens need to pay a whole lot more for new cars, or if electricity is more expensive, citizens will cut back on discretionary expenditures. This cut-back on expenditures will lead to layoffs in discretionary sectors, and will make it more difficult for the government to collect enough tax revenue.

Another basic issue: Wages don’t rise as oil (or energy) prices rise

Economists would like us to believe that we just pay each other’s wages. Wages can rise arbitrarily high independently of actually creating goods and services using energy products.

Unfortunately, this doesn’t seem to be true in practice. Based on my research, in the US high oil prices are associated with flat wages, in inflation-adjusted terms. Wages do not rise as fast as oil prices. Instead, wages tend to rise when oil prices are low, making goods and services affordable.

Part of the problem with rising oil prices is that they radiate through the economy in many ways: in higher food prices, because oil is used to produce and transport food; in higher metal prices, because oil used in metal production; and in higher finished products, such as automobiles and new homes, because they use oil in their production. With wages not rising sufficiently, as oil prices rise, workers find they need to cutback on discretionary goods. The result is recession and job layoffs. I document this issue in the article Oil Supply Limits and the Continuing Financial Crisis, published in journal Energy in 2012.

The flip side of this issue is that without wages rising as fast as the cost of oil extraction, it is hard for the selling price of oil to rise high enough to provide an adequate profit margin for oil producers. It is inadequate oil prices for oil producers that seem to be the current problem. I talk about this issue in two recent posts: What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs and Beginning of the End? Oil Companies Cut Back on Spending.

Economists don’t think that prices can remain too low for oil producers. It can happen, because their model of supply and demand is not correct in a world with energy limits. Even if prices temporarily rise again, recession hits again, and we are back to low prices again.

Another basic issue: Diminishing returns

Diminishing returns occurs when it takes more and more energy or other resources to produce the same amount of goods. In the case of oil supply, we reach diminishing returns because companies extract the easy-to-extract oil first. Thus, the price of oil rises because the oil that can be produced cheaply is mostly gone. If we want to obtain more oil, we need to extract the more expensive to extract oil.

One way to see what diminishing returns does is to think about an economy producing two kinds of goods and services:

  1. The goods and services the consumer really wants–such as food, fresh water, transportation that takes the consumer from door to door, electronic goods, and housing that meets the person’s needs.
  2. All of the intermediate “stuff” that goes into making the end products in (1).

What happens with diminishing returns is more and more of society’s physical labor and its resources go into intermediate products, leaving less and less to produce end products, and less to actually “grow” the economy. In some sense, it is as if we are becoming less and less efficient at producing final goods and services. In my view, this is a major reason why wages stop rising as oil prices rise, and as other energy prices rise.

Another basic issue: The rate of growth in energy supply is closely tied to the rate of GDP growth

We use energy to make goods and services, so it stands to reason that using more energy would lead to more GDP growth. Economists don’t necessarily agree. They are sometimes of the view that the connection has only to do with “Demand”–in other words, when the economy is growing rapidly it needs more oil and energy products to support it its growth. I discuss Steve Kopits’ talk on this subject in Beginning of the End? Oil Companies Cut Back on Spending.

Something that is perhaps not obvious is the fact that cheap energy supply tends to easier to ramp up than expensive energy supply. Cheap energy supply requires relatively less investment. Goods created using cheap energy supply tend to be inexpensive, making them easier to sell to consumers and more competitive in the world market. I talk about these issues in Oil Limits Reduce GDP Growth; Unwinding QE a Problem.  

Another basic issue: The role of debt

Long term debt plays an extremely important role in the economy, because it allows consumers to buy expensive goods like houses and automobiles that they could not otherwise afford, and because it allows businesses to invest in projects before they have saved up sufficient profits from past projects to fund the new projects. It also allows governments to spend more money than they have in tax dollars. All of this purchasing power tends to prop up the price of commodities such as oil and metals, making it feasible to extract them.

We had a chance to see how important a role debt plays in 2008, during the debt crisis in the second half of the year. During that period, the price of oil dropped from briefly hitting $147 barrel to the low $30s range. Major banks needed to be bailed out, and the insurance company AIG was taken over by the US government because of problems with derivatives.

Figure 1. Average weekly West Texas Intermediate "spot" oil price, based on EIA data.

The big drop in oil price in 2008 was due to a drop in oil demand because of lack of credit availability. I wrote an article in 2008  about the huge impact this decrease in credit availability had on energy prices of all kinds, even uranium.

A related concern relates to the fact that “borrowing from the future” — which is what we do with long-term debt, is a great deal more feasible in a growing economy than it is in a shrinking economy. There are a lot more defaults in the latter case, because people keep losing their jobs and businesses keep closing.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The concern I have is that as economic growth slows, we will reach a point where long term debt becomes very hard to obtain. The lack of credit in 2008 has not been fully fixed. It was only with the help of Quantitative Easing (QE), which added more demand to the marketplace because of very low interest rates, that oil prices have been able to rise again after the drop in 2008. With the very slow economic growth we have been experiencing recently, it has been necessary to use QE to keep interest rates low enough that people can still afford to buy homes and cars.

If the economy shifts from adding debt to subtracting debt, we are likely to see a huge drop in oil prices, perhaps similar to the drop in oil prices in 2008 to the low $30′s range. If this should happen again, it is not clear that the Federal Reserve would be able to find a way to make the price rise again because is already using a huge amount of stimulus, and thus has fewer options left.

If oil prices drop to a low level and stay down, a large share of oil production will be discontinued. Very little new drilling will be done. Similar effects are likely to happen for other fossil fuels and for mining for metals as well. Such a drop in oil production is likely to be steep–at least as steep as when the Former Soviet Union collapsed. Oil production dropped by about 10% per year, and other energy use dropped rapidly as well. Customers such as the Ukraine and North Korea saw even steeper declines in their oil imports.

Another basic issue: Government funding

Governments are only possible because of the surpluses of an economy. Greater surpluses allow more government employees and more services. Mario Giampietro (2009) is one researcher who writes specifically about this issue. Furthermore, as an economy grows, rising tax revenue makes it is easy to add more programs and services.

As an economy reaches diminishing returns, studies of past economies show that inadequate government funding is one of the major bottlenecks. This occurs because falling resources per capita leads to increasing disparity of wages, with new workers finding it difficult to find good-paying jobs. Governments are called on to provide more programs at precisely the time when their ability to raise sufficient funds to pay for these programs is lacking. A major factor leading to collapse is the inability of governments to collect sufficient taxes from increasingly impoverished citizens.

The Two Way Escalator Problem

As I see it, the economy as it is currently constructed only gives us two options: up and down. The markers of the “up escalator” are

  1. Cheap energy
  2. Growing energy supply
  3. GDP growth
  4. Wage growth
  5.  Debt growth
  6. Growing government programs

The markers of the “down escalator” are

  1.  Expensive to produce energy supply
  2. Energy supply grows slowly
  3. GDP Growth lags or declines
  4. Wages lag
  5. Outstanding debt tends to shrink
  6. Increasing inability to fund government programs

The two deal-killers with respect to these two escalators are

  • Moving from debt supply growth to debt supply shrinkage. This is like moving from Keynesian economics to the opposite. Or from getting a credit card with a large available balance, to having to pay back old credit card debt without adding new debt.
  • Increasing inability to fund government programs

The above two reasons are why I expect financial and governmental problems to lead to the end of our current system. Diminishing returns is already leading to higher oil prices, and thus moving us from the up escalator to the down escalator.

I am doubtful we can reestablish very widespread use of long-term debt after a collapse because by that time, the economy will clearly be shrinking. A person often hears people talk about getting rid of the fractional reserve banking system because it requires growth to maintain, but in fact, having such a system has been very helpful in enabling extraction of fossil fuels and allowing the economy to use metals and concrete in quantity. The availability of bonds for financing has been helpful as well.

One essential part of today’s economy is very long supply lines. These allow very complex products to be made, using supplies from all over the world. What we found in the 2008 credit crisis is that many businesses (both large and small) in these supply chains were hit hard by lack of credit availability. I see this issue as being very difficult to solve. If it cannot be solved, we will be faced with making goods locally using smaller companies and very much shorter supply lines. It would be a different system than we have today, and would likely support a smaller world population.

A lot of “peak oilers” would like to think that somehow it is possible to “get off at the mezzanine,” and have a viable economy similar to today’s with a small amount of expensive renewables, plus a continuing supply of fossil fuels. I have a hard time seeing this actually happen. One problem is the likelihood that fossil fuel supply will decline quickly because of low price. Another potential problem is a major cutback in credit availability making transactions difficult; a third issue is governmental problems, as taxes fall short of what is needed to fund programs.

We could in theory get back on the up escalator if we find alternative fuels that meet all of the required specifications–very cheap; available in huge quantity, expanding year by year; can be transformed to a liquid fuel similar to oil; and non-polluting. This seems unlikely right now.

Otherwise, what we do have is all the “stuff” we have today, for as long as it lasts. The economy won’t stop on a dime. We also have the ability to recycle things that we can no longer use, that might be more helpful in another place. Solar panels that people currently own will continue to function for a while (especially off-grid), and the grid will probably continue for a while. We know that many people lived in local economies, before we had fossil fuels, and it is likely to be possible again. We certainly live in interesting times.

…and so it BEGINS

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Published on the Doomstead Diner on March 2, 2014

Discuss this article at the Geopolitics Table inside the Diner

The Frosbite Falls Daily Rant is the latest Feature of the Collapse Cafe on the Doomstead Diner.  It can be found daily on the Homepage of the Diner on the right menu bar.

The transcript for this rant can be found at the bottom of this article.

Day 2 has arrived here in the Valve War between Ukraine and Russia, centered mainly in Crimea at the moment, but bound to move Eastward as time goes by here.  I covered a few of the main issues in the daily rant yesterday, for today we will look a little more closely at the logistics involved here.

As you can see from the Infographic at the top of the page, this isn’t a small military exercise by any means.  More than 10,000 troops are being repositioned, which is quite a tidy sum considering the Ruskies were downsizing their Military.

2008 Russian military reform

(H/T Newzy Joe on the Diner for this table)

While the Ruskie military is still pretty large, you have to remember that all “active personnel” are not “Boots on the Ground” aka Grunts who do the dirty work and get regularly sent to the Great Beyond in one of these actions.  So Vlad is committing quite a large percentage of what is left of his military assets to try and take control of Ukraine.

While the mostly Russian speaking eastern Ukrainians are mostly lined up with Vlad, even they don’t necessarily want to become a vassal state of Russia again.  They only got out from under the old USSR hegemony 20 years ago!  The Western half of the population definitely isn’t too happy about this state of affairs, so you basically have now a War in all but official declaration, and even that gets closer all the time.

NATO and Obama-sama still haven’t done anything but bluster, and it is unlikely they will do much on the military end at this time.  The NATO countries don’t have that many troops they can call up at the drop of a hat (or bomb), and most available FSoA military assets are currently deployed far and wide at a bazillion global Military bases as well as being mired down in places like Afghanistan.

However, just because they don’t have military assets to throw at this problem doesn’t make them helpless, they do have financial ones.  Accelerating Capital Flight out of both Ukraine and Russia can do a lot more damage to Vlad the Impaler’s political control than a Firefight in Sevastopol.  So this is probably where we have to look for the Action to be next week from the NATO/western Illuminati end.

http://www.downloadswallpapers.com/wallpapers/2012/agosto/medio/navios-e-naves-no-oceano-wallpaper-21713.jpgLogistically speaking, all the “Big Power” Militaries of the Ruskies, the Chinese and the FSoA are over-extended past what they can actually support anymore to try and control far flung regions of the earth.  The Chinese are buying up African Land and Oz Mines, but they need their own Million Man Army right at home to keep control.  The Ruskies have the same problem, their last failed adventure outside of their own region in Afghanistan was  a magnificent failure, and subsequent adventures inside their sphere have not faired much better.  All their border states like Georgia are contantly in virtul revolt; just keeping the lid on there stretches them pretty thin.  For the FSoA part, we send Carrier Groups willy-nilly around the world as a “show of force” in each latest Hotspot, but we only got like 11 or so of these Carrier Groups I believe.  Drop a couple in the Mediterranean, a couple in the Indian Ocean, a couple in the South China Sea, a couple in the North Atlantic, a couple off the coast of Brasil and one in the Gulf of Mejico and POOF, you are frehs OUT of Carrier Groups!  Not to mention all a Carrier Group does at best is to allow you to control the local Sea Lanes and drop Death From Above on the nearby locals, they don’t allow you to put enough Boots on the ground in ANY of these places to do much more than take over a few Goobermint Buildings in the central city, for that you gotta mobilize a lot of troops ships, land tanks and APC yadda yadda.

In all likelihood at this point, it appears that the “Powerful” Goombermints and Militaries of Russia, china and the FSoA will soon be engaged much more in keeping their own Local Populations in control, so trying to control anywhere else is pretty much a non-starter.  Ukraine is close enough physically to Russia with enough traditional ties they can make this physical attempt one more time, but they will face a constant state of revolt inside Ukraine, just like Georgia and the rest of the peripheral states now really starting to hurt.

The problems in Ukraine will move themselves quickly enough to Poland, Hungary, Belarus etc, and the Western European states will see Blowback as Gazprom energy gets shut off at critical Valves through Central Europe.  This further roils the markets and their economies, already very shaky to begin with, so they too will begin to topple.

Building up this whole interconnected Global system has been ongoing for 500 years here.  It will come apart a whole lot quicker than that.  The World Trade Center is the best analogy I can come up with here.  The project had it’s inception right near the end of WWII in 1943, took until the 60s to get funding, and didn’t open up until 1973.

The idea of establishing a World Trade Center in New York City was first proposed in 1943. The New York State Legislature passed a bill authorizing New York Governor Thomas E. Dewey to begin developing plans for the project[11] but the plans were put on hold in 1949.[12] During the late 1940s and 1950s, economic growth in New York City was concentrated in Midtown Manhattan. To help stimulate urban renewal in Lower Manhattan, David Rockefeller suggested that the Port Authority build a World Trade Center in Lower Manhattan.[13]

Initial plans, made public in 1961, identified a site along the East River for the World Trade Center.[14] As a bi-state agency, the Port Authority required approval for new projects from the governors of both New York and New Jersey. New Jersey Governor Robert B. Meyner objected to New York getting a $335 million project.[15] Toward the end of 1961, negotiations with outgoing New Jersey Governor Meyner reached a stalemate.[16]

At the time, ridership on New Jersey’s Hudson and Manhattan Railroad (H&M) had declined substantially from a high of 113 million riders in 1927 to 26 million in 1958 after new automobile tunnels and bridges had opened across the Hudson River.[17] In a December 1961 meeting between Port Authority director Austin J. Tobin and newly elected New Jersey Governor Richard J. Hughes, the Port Authority offered to take over the Hudson & Manhattan Railroad to have it become the Port Authority Trans-Hudson (PATH). The Port Authority also decided to move the World Trade Center project to the Hudson Terminal building site on the west side of Lower Manhattan, a more convenient location for New Jersey commuters arriving via PATH.[16] With the new location and Port Authority acquisition of the H&M Railroad, New Jersey agreed to support the World Trade Center project.[18]


A good 20-30 years to get those buildings up.  They came down in seconds.  So it will go with this as well, when it Blows, it will Blow Big and it will Blow Fast.  In the words of Leonard Cohen,

Everybody knows it’s coming apart
Take one last look at this Sacred Heart
Before it blows
And everybody knows

Transcript of the Ukraine-Russia War Rant

Greetings Doomfans, and welcome to another edition of the Frosbite Falls Daily Rant.

Tonight we are revisiting a topic from a few nights ago, the ongoing spinout in Ukraine. A few nights ago it was a Civil War in progress, tonight it is a WORLD WAR in the making.

Reason? Vlad the Impaler, the Noble ex-head of the KGB over in Ruskieville decided since he could not or would not Pony Up $35-50B in FOREX scratch the Ukrainians need to keep their version of the Industrial Society running, the better option was simply to roll over them with APCs, Helicopters and Troop ships!

On the NATO side of this battle, John Kerry offered up chump change of $1B in loans from the sharks at the IMF, which barely could keep an Oligarch in Maseratis and Airbus Double Decker Private Jets for a week or two, much less pay off on Pensions to the Ukrainian Population.

Why does EITHER side here give a Flying Fuck who is wandering the halls of the Ukrainian Parliament and running the show there? Why not just leave them alone and let them work out their OWN fucking problems?

Two main reasons. First off, Ukraine has a shit load of pipelines running across the territory which ship Gazprom Energy from Mother Russia over to Western Europe, which is a MAJOR source of FOREX revenue for the Ruskie Oligarchs, including of course Vlad the Impaler.

Second reason is Ukraine is (like everybody else) in HUGE debt to the TBTF banks, and if they don’t get some new Hard Currency FOREX Scratch to roll over their old loans, they will default. This will play nasty HAVOC with the Russian banks, which have the biggest exposure, but of course all the TBTF banks in the West are exposed to this mess also in the Daisy Chain Circle Jerk of derivatives, interbank loans and Worthless Collateral they used to rehypothecate still other loans made elsewhere. If anybody here on either side has to write down Ukrainian debt, the TBTF banks will have to pay a LOT of Overtime to their Accountants so they can cover it up and not be blatantly Insolvent, just Shadow Insolvent.

For their own part, the Ukrainians hold one Ace in the Hole, they actually have their fingers on the valves that transit NG over from Mother Russia to Eurotrash. If SOMEBODY doesn’t pony up some more money for them to keep going here, the average J6P Ukrainian has NOTHING LEFT TO LOSE, so why not blow a few Pipelines and pass the Suffering on to the folks to the West and East of them? They shut down the pipelines, the Eurotrash runs short on energy to keep the Lights on, and the ruskies run short of Forex to keep the Rouble floating as a Happy Currency. Everybody suffers with them!

Herein lies the big PROBLEM with Vlad the Impaler’s physical takeover of the apparatus of Goobermint in Ukraine, the Western interests don’t necessarily have to retaliate with rolling their own APCs and Helicopter Gunships into Ukraine on a UN Sponsored “Peacekeeping” Mission, they can simply mount a concerted Financial Attack on the Rouble. Putin’s Goobermint already has plenty of issues maintaining control over the pretty vast Ruskie territory (even though shrunk from the Lacyon days Back in the USSR), if the Rouble gets driven down in FOREX trade and they can’t sell NG to Western Europe, their own economy will flush down the toilet in a big hurry.

For the Ruskies to take control of this problem on the Physical Level, they have to control the ENTIRE transit of Energy from the Ruskie Gas Fields across to the Eurotrash Konsumers of that energy, and they cannot do that simply by holding Crimea, which they also can’t do with a few 1000 Shock Troops. All that enables them to do is hold a few Goobermint Buildings and install some Puppet Leaders there. They have to roll across the WHOLE of Ukraine, and they have to not only prop up Puppet Leaders in Goobermint, they have to keep the local VERY unhappy population from dropping a few IEDs at critical nodes in the NG pipeline transport system. That will take a LOT more boots on the ground to do, and it is highly questionable that Vlad the Impaler could bring such a force to bear. Very similar to NATO trying to control the energy transit down in MENA with so many of the locals hostile to them.

It remains to be seen how this will play out medium to long term, and in what manner. However, both sides are between a Rock & a Hard Place. Under no circumstances can I see will the Energy flow through Ukraine continue Unimpeded. This will negatively affect all of Europe and Russia too. Neither side can back down here, so escalation seems likely. Duck and cover Doomers, we are now at DefCon Orange.

And that’s all the Doom, this time until next time here on the Frostbite Falls Daily Rant.

 

Knarf plays the Doomer Blues

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