Nothing Lasts Forever



Triangle of Doom 110313(1)

Figure 1: the Triangle of Doom® Brent crude futures by CommodityCharts.com. Where we are within the triangle is a bit like Alice half-way down the rabbit hole. What is at the other end?

Americans don’t want to know as their precious cars slowly slip away … along with the suburbs, the jet vacations to Las Vegas and Orlando, the college educations for the children, the ‘money-for-nothing’ investments, the privilege and the absence of accountability. Right now the car and the cost of fuel is pricing everything else out of reach … and the Americans are too dumb and TV-addled to recognize it.

Drillers are able to borrow from finance for modest periods of time. They have done a very good job promoting their latest speculative efforts and have been able to find hundreds of billions of dollars in new financing for plays that are marginal compared to previous plays. After the drillers borrow the customers arrive to retire the drillers’ loans with their own … either that or the drillers go out of business.

Because the new plays are more complex and difficult to exploit, the amounts needed by the drillers steadily increase. Fifty years ago a dollar would return fifty dollars or more worth of new crude, presently a dollar returns ten dollars or less. This diminution of returns is the consequence of our society’s extraction- and consumption success. No greater drilling effort … or monetary ‘cheating’ … can retrieve lost productivity. Waste has a lower entry cost than drilling; what we do best is waste more, faster.

Customers ultimately meet the cost of petroleum, they must borrow to do so. Meanwhile, what is borrowed for is simply thrown away. Oil in the ground is perpetual but its use is one-time and instantaneous. Because fuel has historically been improperly priced as a ‘loss-leader’ for the rest of industry there is no incentive to find other uses but to burn it for pleasure and label the process ‘work’. This lie has become very costly over the long term,

Continued borrowing in ever-increasing amounts of fuel slowly pauperizes the oil consuming customers who are ruined by their goods’ absence of return. Besides fuel, customers must borrow to pay for cars, freeways, parking lots, insurance companies and militaries. Think of energy components as accounting entities: the cost of fuel- plus the cost of credit needed to gain the fuel are on the ‘expense’ side of the ledger, the returns from using the fuel, the cars, freeways and whatnot are entered on the ‘income’ side, these two entities added together must equal zero. However, fuel use offers minimal returns; driving the car cannot pay for the car or anything else. Balancing the national energy ledger requires borrowing; eventually the account becomes nothing but a mass of bad loans.

This is how the world has accumulated so much debt, not social programs for humans but credit subsidies for the auto- and auto related industries and the absence of return for these things’ users. Right now, the arguments about continuing social programs are about choosing what to jettison in order to keep driving cars and wasting fuel. This is a foolish choice because the onrushing costs of subsidizing the car industry and fuel supply are unsustainable. Regardless of what choice is made the end result is insolvency and deleveraging … and fuel shortages.

A too-high price for fuel causes distress within the credit system: consider the too-high price to be the ‘upper bound’ where enough damage is done to the economy to destroy fuel demand. Since 2008 there has been an observable series of stepwise declining high fuel prices along with repeated crises; each succeeding price lower than those preceding, each crisis being more damaging. The world is becoming poorer every day … made so by the marching real costs of credit and petroleum.

The demand destruction process is incremental and cumulative: over time more customers become insolvent and can no longer borrow. As a consequence, governments have become the world’s borrowers of last resort. They are the ‘last man standing’ able to indirectly subsidize the petroleum industry. Governments and their central banks have become the rear guard of the waste-making status quo even as their own credit costs mount.

The next step down the rabbit hole is for governments themselves to become insolvent … and for the fuel-waste regime to simply fall apart, as it must. This will occur even as the extraction industry by itself appears to be robust … due to its own self-aggrandizing propaganda and wishful thinking on the part of consumers.

Here’s a note by Jeffrey Brown on rising costs, (Peak Oil Barrel/Ron Patterson):

Recent Global Annual Crude Oil Prices Versus Global Net Exports of Oil and Rising US Crude Oil Production.

We have of course seen a cyclical pattern of higher annual highs and higher annual lows in global (Brent) crude oil prices in recent years, but I think that the rates of change between successive annual price lows, or troughs following annual oil price peaks, is very interesting.
 
Peak to Trough Annual Brent Crude Oil Prices, 1997 to 2013

  • 1997: $19
  • 1998: $13
  • 2000: $29
  • 2001: $24 (1998 to 2001 rate of change: +20%/year)
  • 2008: $97
  • 2009: $62 (2001 to 2009 rate of change: +12%/year)

The 11 year 1998 to 2009 overall of change in trough prices was 14%/year.
 

  • And then we have 2012 to 2013.
  • 2012: $112
  • 2013: $108 (Est. price)

Based on estimated price for 2013, the four year 2009 to 2013 rate of change in the trough price would be 14%/year ($62 to $108).

The long term 15 year 1998 to 2013 rate of change in trough prices would also be 14%/year ($13 to $108).

While currently rising US crude oil production has certainly contributed to keeping annual Brent crude oil prices on a plateau of about $110 for three years, something that is not widely understood is that the annual volume of oil lost to declining production from existing wells is almost certainly increasing at a rapid clip.

Assuming an average production rate of 7.5 mbpd (million barrels per day) for 2013 and assuming a 10%/year decline rate from existing oil production, we would need to replace the productive equivalent of 100% of current US crude oil production over a 10 year period, everything from the Gulf of Mexico to Alaska, in order to maintain 7.5 mbpd.

If we assume that the the decline rate from existing US oil wells increases from about 10%/year in 2013 to 20%/year in 2023 (a more likely scenario in my opinion), we would need about 12 mbpd of new production in 10 years, in order to maintain 7.5 mbpd for 10 years. Under this scenario, the annual volume of oil production lost due to declining production would increase from 0.75 mbpd in 2013 to 1.5 mbpd in 2023.

 

Even if the US can come up with the needed credit, it is hard to see where the needed oil will come from.

 

Figure 2: decline rates vs. number of wells and extraction rate of new well @ Bakken from EIA, (from Matt Mushalik/CrudeOilPeak). As tight wells age, the rate of depletion increases. More wells must be drilled to keep pace with depletion along with even more to increase ‘production’.

It is not simply age that causes wells to deplete but our restless urge to waste capital for fun, driven by a false understanding that if we do not waste, then someone else will waste in our place.

A proverb in the futures’ markets is, “the solution to $10 corn is $10 corn …” The high priced corn is an incentive for farmers to bring more to the market which would drive prices lower. The energy analog is, “The solution to waste is waste …” Given accelerated rates of waste the outcome is resource capital exhaustion, bankruptcy and the inability to waste at all … not the best way to run a business.

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48 thoughts on “Nothing Lasts Forever

  1. dolph

    Another interesting post. Everything I’m reading suggests to me that oil prices might remain stable to low in real terms, but that we will have cascading shortages and bankruptcy throughout waste based sectors such as auto, airline, tourism, construction, etc.

    Now the opposite line of thought is that we have a rising real oil price and rising production. This is favored by the cornucopians (even they have had to admit that oil prices will not fall).

    However everything is pointing to the former, you have laid out the case very well.

      1. ben

        my previous reply was meant as a comment unrelated to dolph’s. although, dolph, what steve has laid out the case for is higher and higher real oil prices with cascading shortages. if the prices drop below the lower bounds of the triangle of doom for a significant length of time the real price will be increased as per the rules of debt deflation.

      2. steve from virginia Post author

        You were right the first time, the real price increases even if-as the nominal price falls.

        The real price (of anything) is relative to the ability to meet it; as the ability wanes there is an increasing scarcity premium added to what (thing) remains.

        The same thing happens with money & debt deflation: there is a scarcity of money (currency); a premium to what remains is added making money unaffordable. The debt grows even as it is paid off.

    1. steve from virginia Post author

      It’s hard to get excited about the ‘Curvilinear of Doom’ Josh …

      ‘Vortex of Doom’ has been getting some discussion.

      1. steve from virginia Post author

        Funny to see all the tori out there:

        – Heading toward a Cliff

        The global economy is likely experiencing a bigger bubble than the one that unleashed the 2008 crisis, and should it burst the ensuing recession would be mammoth

        By Andy Xie

        The Fed’s QE policy has caused a gigantic liquidity bubble in the global economy, especially in emerging economies and asset markets. The improvement in the global economy since 2008 is a bubble phenomenon, centering around the demand from bubble goods or wealth effect. Hence, real Fed tightening would prick the bubble and trigger another recession. This is why some talk of the Fed tightening could trigger the global economy to trend down.

         

      2. dolph

        I’ve learned alot from zerohedge, even if the discussion there is harebrained.

        Technical analysis, on the other hand, is pseudoscience and you know it.

  2. george

    uh uhh
    those who are on social give a way programs drive the most expensive cars
    the american taxpayer is the biggest sucker in history

  3. Georgia Meyers

    Sorry if there is more than just rewriting user name and email address ….I am out of the loop.

    1. steve from virginia Post author

      Welcome to the loop!

      On the home page on the right side there is a category labeled ‘Site Info’. Inside there is a link that says ‘Register’. Click on that and follow the steps which should be pretty-much self-explanatory. WordPress should send you a password you can use to log on and then re-edit your personal information … such as a more easily-remembered password.

      thanks, steve

  4. Ken Barrows

    Just want to test my registration. But while I am here, I find it odd that the WTI-Brent spread disappeared a couple of months ago and now has widened back to more than $10 per barrel. Any ideas?

    1. steve from virginia Post author

      Probably has to do with increased output in USA shale fields relative to static output elsewhere (where there is greater transmission infrastructure). Increased shale output feeds constrained markets = local glut(s) as w/ shale natural gas:

      http://peakoilbarrel.com/shale-oil-production-decline/

      Drilling in places such as Bakken are outstripping the ability of service companies to attach wells to pipelines thence to world markets @ higher Brent price. In a way, the WTI price is ‘artificial’ as it is fuel supplied to Cushing, Oklahoma, terminals.

      It’s good to read the comments on Ron’s articles (I see you are there, too) … including this chart of charts including the various and sundry ‘peaks’ … from Ted Patzek/Alister Hamilton:

       
      Also take some time to read this: http://srsroccoreport.com/must-read-the-bursting-of-the-shale-gas-bubble/must-read-the-bursting-of-the-shale-gas-bubble/

       

      1. Jb

        This chart suggests to me that we are about to see the abrupt and permanent end of the middle class in the US.

        Does anyone else come to a different conclusion?

        Thanks.

      2. ben

        yes, i do. how about an (non-marxist and non-hitlerian) abrupt and permanent end of the classes ALTOGETHER in the US? 🙂

        incredible chart. almost as good as the TOD as viewed from the frustum, but not nearly as good as the TOD when viewed from the viewpoint.

        can’t get onto your website, Jb.

      3. Jb

        The Great Equalizer a.k.a. the Chart of No Return.

        Sorry, Ben. I made some changes. Try this instead: http://jbsties.tumblr.com/

        My 5″ black stove pipe came today from The Other Store. It was cheaper than ordering from 4 Dog Stove company that wanted $16 for shipping. Chance of flurries here tonight; two cords of wood stacked and ready to go. And the pumpkin ale is finally carbonated.

    1. ben

      made me laugh, josh. i’ve never seen anger take so long to explode. in the meantime i had gotten to figuring that you take such criticisms as a compliment in the vein of ‘i resemble that remark.’ 🙂

    2. dolph

      Chartist:

      You are a hack, a chartan. I would sooner consult an astrologist.

      Do you think you are going to win any friends with your outbursts?

      I would wish you luck in these troubled times, but then again you are probably going to get things wrong, and even if you did get things right, you wouldn’t know what to do with the information.

  5. ben

    “Chance of flurries here tonight; two cords of wood stacked and ready to go. And the pumpkin ale is finally carbonated.”

    glad to hear you’re all set. that’s a fine looking glass of beer. i will set my first Wik-style overnight fire wrapped in glossy paper tonight as M has some yoghurt dough on the counter that needs to soak at room temp until the morning; Lodge makes a 2qt dutch oven with lipped lid that will fit through the 3 Dog door…

    1. Jb

      Nice tip on the Lodge; thanks. I’ll have to add one to my collection of cast iron cookware which I use every day.

  6. Pingback: futures, real and imagined- part 4 | Brain Noise

  7. Jb

    “As details emerged of a Western proposal that could let Iran sell oil and gold in return for curbs on its nuclear activities,…”

    http://www.reuters.com/article/2013/11/14/us-iran-sanctions-israel-idUSBRE9AC0YL20131114

    Unbelievably generous of us, wouldn’t you say? It’s good to be the King! Meanwhile in Portugal:

    “Yet for those with unpaid electricity bills or for jobless families who can’t afford to replace a broken washing machine, this free medieval equivalent of a launderette is the only place they can afford to use.”

    http://www.bbc.co.uk/news/business-24915845

    Hey at least they have medieval infrastructure! And the architects are giving tours of abandoned buildings; what a future.

    1. steve from virginia Post author

      – The Arak reactor in Iran is extraordinarily provocative, it is designed to produce plutonium. Plutonium has no use other than as nuclear weapons material, none whatsoever. If the Iranians insist on putting this reactor into service, the Israelis or the US should insist on blowing it up.

      – Portugal lights the path for the rest of the world along with Greece, Egypt, Syria, Yemen, Ireland and Argentina. BBC blames the problems on austerity; if that what the bosses want to call fuel stringency, that is what it will be for all of us. BTW: there is nothing wrong with washing clothes in a sink which is what these women are doing, I do it all the time.

      : )

      1. ben

        good man. I haven’t put the agitator and wringer to use in ages. simply must. can now dry clothes easily in winter with the wood stove.

        ultimately it’s the zionists and neoliberals who are insisting upon the iranian state putting that reactor into service, no?

      2. steve from virginia Post author

        The Iranians themselves insisted to the French two weeks ago they intended to start the Arak reactor. This is serious business, not to be confused with ‘centrifuges’ or uranium enrichment. Iran inches toward a war with a nuclear component.

        Processing metallic plutonium from uranium matrix is a fairly simple chemical processing job. Afterwards, making a nuclear explosive and amplifying it with styrene, U-238, deuterium or lithium-7 is not difficult. It is harder to make a jet engine from a materials- and fabrication standpoint than making a thermonuclear bomb.

        http://www.bloomberg.com/news/2013-11-11/-super-hawk-fabius-is-right-about-iran-s-arak-reactor.html

        A world-wide moratorium on plutonium production would be rational in a resource depletion regime where countries become failed states in short order.

      3. ben

        that may be but non-proliferation is still a marketing ploy for the prolific, and imposing it on iran is a fool’s errand.

      4. Ellen Anderson

        Does that explain France’s behavior in the recent discussions? Of course making a nuclear bomb and using it are two different things, are they not?

      5. steve from virginia Post author

        That is why France ended talks.

        Most of the hoopla surrounding Iran’s nuclear program has been about a red herring … it’s uranium enrichment @ Fordos. The ‘research’ reactor at Arak is a five-alarm fire.

        The comforting assumption is that the Iranians (Pakistanis, Indians, English, Israelis, etc.) will simply build weapons then stockpile them for a rainy day as the US and Europeans have done. This assumption is just that. It will hold until it doesn’t … then nobody will have seen the resulting nuclear exchange coming.

  8. The Dork of Cork

    Otherwise safe Canadian heavy water reactors produce much excess plutonium but their role is to provide some of the base load.
    Anti nuclear projection is all about controlling the price of nat gas (upwards) by the experts in the field of scarcity – its the old Anglo dutch oil / monetary cartel.

    The last thing that crew want is the production of primary products by a domestic and national workforce that actually does something useful.

  9. Ken Barrows

    Bakken September update:

    $1 B in additional wells (135 wells) for -229K in total oil production. Of course, September has one fewer day than August.

  10. Evan

    I am a real person and won’t comment much but find your commenter’s view points almost as valuable as your initial material. I would hate to have the quality degrade.

      1. steve from virginia Post author

        It is ominous, so is the title of the next article.

        Ominous hangs in the air …

    1. Jb

      Ha! – made me laugh. Nobody cares what’s going to happen in 2030. When my clients start talking about the re-sale value of the homes they are building, I just nod politely.

    2. steve from virginia Post author

      To make your government a profit (at the expense of the stupid buyers)! It will also raise the sea level but a few millimeters all by itself! Who needs sand dunes, anyway?

       
      🙂

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