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Shale and Petroleum – The Big Picture (Part 2)

Shale and Petroluem - The Big PictureIf you have not yet read Part 1 of this series, you’ll want to go back and do so before tackling this Part 2.

And if you’ve read Part 1, you’ll recall that we took an in-depth look at why conventional oil production follows a bell curve (known as “Hubbert’s Curve”), and where on that curve we find ourselves today—which happens to be, either at or very near the peak. Continuing with our A. Whitney Brown-style “The Big Picture” approach, we need to now talk about unconventional oil sources, which we’ll get to by way of first discussing some of the red herrings and straw man arguments that have been used to downplay or dispute the peak of conventional oil production.

Sometimes you’ll hear Peak Oil mischaracterized as being a theory about the world imminently running out of its finite amount of oil. (In actuality, the world never will run out of oil, because there will always be oil in the ground that cannot be profitably extracted). You’ll also perhaps hear of the mythical fantasy of “abiotic oil” coming to our rescue. There’s probably more evidence in the existence of the Tooth Fairy (hey, I put a tooth under my pillow and woke up to find a quarter there instead) then there is in the idea that the earth is currently creating an abundant amount of brand new oil for us from non-organic material, but that doesn’t stop some people from continuing to trot out this theory. According to them, we don’t need to wait for millions of years for the earth to do its work on plant and animal remains—the earth is a veritable petroleum factory![1] Sure, and I’ve also got some fantastic ocean-front property in Iowa for a great price that you’ll be interested in.

Still others have been saying not to worry at all since necessity is the mother of invention and humans are incredibly resourceful and undoubtedly will innovate their way out of the problem — thus, they acknowledge the challenge presented by decreased oil discoveries, but they admonish us to not hold onto any concerns because we’ll resolve this problem in the future by simply increasing our oil discoveries. When we really, really, really need it, we’ll find it, with our improved technology. Additional technological developments will also help us prevail. This view is championed by many talking heads, and indeed has begun to take hold as an accepted fact. And one can see why — because it’s actually been proven to be true.

Well, sort of.

For an illustrative example of how this line of reasoning plays out, let’s consider the CNBC interview with industry expert T. Boone Pickens (founder of BP Capital Management) from a few months back, on December 23, 2014. During a detailed discussion of the current oil and gas markets, Pickens happened to mention Peak Oil as having already arrived in 2005, and the CNBC anchors rushed in to protest, saying that the proponents of Peak Oil all look pretty foolish now because the introduction of unconventional oil from shale has disrupted the Peak Oil predictions. In that brief exchange, Pickens and CNBC both acknowledged the fact that unconventional oil has served as a rabbit pulled out of the hat to save the day, supplementing conventional oil production sufficiently to avert the consequences that had been predicted to come if conventional oil had remained essentially our sole source of oil. Ok, duly noted. But did it make sense for CNBC’s host to then assert that Peak Oil was thus a “horrible call”? Pickens certainly didn’t think so, unabashedly responding that “That’s all good bullshit, and all.”

As you can probably already figure out on your own, the introduction of the so-called “shale revolution” by the U.S. — which has created the unique opportunity to create conventional fuel out of an unconventional alternative source — does not in any way disprove that conventional oil is reaching or past a peak in world production. Pickens tried to offer this response (while getting interrupted and bogged down). You can see him struggling to even take the denunciation seriously. After all, invoking shale as proof against peak conventional oil is quite the contradiction. One might call it a “denial via confirmation.” By pointing out that shale saved aggregate oil production from dropping, one acknowledges that oil production would have dropped without shale. On these points, Pickens and CNBC clearly agreed. It was just a bit mind-numbing to then be expected to accept the idea that Peak Oil should thus be thrown into the trash-bin of economic foolishness. Seriously?

Why do we even have shale oil, and the other unconventional sources? Because discovery of the traditional oil has dropped off and is not coming back, and thus its production must soon drop off. Shale, and tar sand oil, which are difficult and expensive to produce, only exist because of this, and especially because U.S. conventional oil production already peaked years ago. Their introduction to the mix of crude oil sources has clearly delayed the arrival of the peak of aggregate oil production (or perhaps maybe only extended that “plateau” mentioned above). But here we’ve gone into new territory and are talking about aggregate oil production, which is a whole new concept. The fact that shale has saved the day shouldn’t blind us to a simple fact—that conventional oil production capabilities have not been affected one iota by shale (except indirectly, by alleviating the need for the oil market to be completely served by conventional sources, and thus somewhat reducing the volume of conventional oil needed).

This is where the need to clearly define terms becomes obvious — Peak Oil has for decades now referred to the ceiling of conventional oil production, and this is what T. Boone Pickens and so many other experts still mean when they use it. However, various media pundits, analysts, and even well-meaning activists have pressed forward with the use of Peak Oil as a term to refer to all of the economic effects that will undoubtedly come when global aggregate oil production reaches its peak. These effects range (depending on who you listen to) from excessively high oil prices to a Mad-Max-style apocalyptic downfall of civilization. Clearly, these are vastly different meanings.

At this point, one might ask, if we aren’t barreling into a peak in aggregate oil production, does it even matter if we’ve peaked in conventional oil? Of course it does. Why? Because only conventional oil is cheap. Remember the former Shell chairman? “Any new or unconventional oil is going to be expensive.” As we go forward, and reliance on the more expensive oil increases, there will undoubtedly be major impacts to the world economy.

This is not to single out CNBC; they were merely expressing a prevailing media narrative today. And, granted, there is a kernel of truth to the heart of that idea that the free markets did their job, and ingenuity and human innovation prevailed. . . . For now. Sure, the introduction of unconventional oil sources has successfully averted those strains to the world economy that we would undoubtedly be experiencing already if not for their coming on line. ”Successfully delayed” might be a more cautious statement, though. Yes, shale is great. Rah rah rah. Does the shale anomaly prove that we will continue to find innovative, profitable (remember, nothing happens if there’s ultimately no profit) ways to make conventional fuel out of unconventional source material? Hardly. How many shale-oil–type rabbits does this hat have in it, anyway?

The rates of EROEI (Energy Returned on Energy Invested) for shale and tar sands are not stellar. It’s probably safe to assume that any additional unconventional sources in the world have worse EROEIs, or we would be exploiting them already. The point here is that shale and tar sands are not petroleum. They are not cheap to produce. Plus, their production will no doubt follow their own bell curves. At some point down the line, “Peak Shale” will loom on the horizon. Human innovation better have reached a seriously real level by then, if not sooner.

So, don’t be fooled by anyone trying to tell you that “oil is oil,” and that with shale we found more “oil,” and thus those Peak Oil theories were foolish. To hold to this stance, one must either be operating from a bad misunderstanding or be engaging in a bit of intellectual dishonesty. To say that Hubbert’s theory has been proven wrong because shale has stabilized world production is like saying “The theory that The Beatles broke up in 1970 has been proven wrong—just look at how many new albums they have released since then, including some new material! The free market worked and responded to our demand for new Beatles albums by increasing the supply!” Unfortunately, there’s not a whole lot you can do when the discussion veers that far south of reasonableness, other than what Pickens did: shrug your shoulders, shake your head, and say “Ok, move on.”

Stay tuned for Part 3 in this series, in which I will address other pertinent macroeconomic forces, and draw from our knowledge of the new oil paradigm (comprised of both conventional and unconventional sources) in order to craft what A. Whitney Brown used to refer to on Saturday Night Live as “The Big Picture.”

[1] I should point out here that there does remain some open scientific question as to whether some small portion of oil on the planet was, in fact, created through abiotic (i.e., inorganic) processes. Even if this were conclusively proven to be true, however, the issue would be moot with respect to our concern of global oil production. No credible scientist has proposed that any significant quantity of new oil reserves is being created on the planet by any process, whether organic or inorganic.

About Brad Daniel

Brad Daniel is a Director at BMC Group, an information management firm specializing in financial and legal transaction support. He has 25 years of restructuring experience, with a broad exposure to all aspects of bankruptcy case administration and reorganized-company/trustee support. His expertise in both bankruptcy legal matters as well as systems integration and rapid application development…

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