The Roman Philosopher Lucius Anneaus Seneca (4 BCE-65 CE) was perhaps the first to note the universal trend that growth is slow but ruin is rapid. I call this tendency the "Seneca Effect."

Sunday, November 27, 2022

The Most Amazing Graph of the 21st Century: How the Empire is Striking Back!

 


In 1956, Marion King Hubbert predicted that the US oil production would follow a "bell-shaped" curve, starting an irreversible decline around 1970. He was basically correct but, around 2010, the production curve restarted growing. This abrupt rebound was an amazing event that propelled the US back to the role of largest world producer of crude oil, and to become noticeably more bullish in geopolitical terms. Buoyed by its large oil production, the Empire is striking back. But for how long? (image by Paul Kedrosky)


Years ago, James Schlesinger noted that human beings have only two operational modes: complacency and panic. It is an observation that rings true and that we can generalize in terms of groups: some humans are catastrophists, and some are cornucopians. I tend to side with the catastrophists, to the point that I created the term "Seneca Effect" or "Seneca Cliff" to define the rapid decline that comes after that growth stops. Indeed, catastrophes are a common occurrence in human history, but it is also true that sometimes (rarely) a catastrophic decline can be reversed: I termed this effect the "Seneca Rebound.

There is an impressive example of rebound with the story of the US oil production. You probably know how, in 1956, Marion King Hubbert proposed his idea of the "bell-shaped" curve. He turned out to be approximately right in his prediction: the US oil production started to decline after peaking in 1970, following a trajectory that seemed to be irreversible. In the early 2000s, after nearly 40 years of decline, no geologist sane in his/her mind would have said that the decline could be stopped, to say nothing about reversing it. It was not a question of being catastrophist or cornucopian: the members of both categories would normally agree that extracting large amounts of oil from "non-conventional" sources was simply unthinkable in economic terms. 

And then, something happened that changed everything. It took a few years before the new trend was clear but, by the mid-2010s, it couldn't be ignored anymore. By 2018, the US production had returned to the levels of its 1970 peak. In 2019, it had overcome it, and it kept growing. The production of natural gas followed the same trend, shooting up rapidly to levels never seen before. In 2020, the Covid crisis caused a new drop in production, at present only partially recovered. But let's forget the Covid story for now. What happened that changed things so much in the US oil industry?

You probably know that the cause has a name and a story: it is called tight oil or "shale oil," extracted by "fracking". It itself, it is nothing especially new, the concept was already known in the 1930s. The idea is to use high pressure to fracture the rock that contains the oil. That makes it possible for the liquid to flow to the surface. The problem with fracking is that it is expensive. So much that it is commonly said that nobody made any money on it. In 2017, an analysis by the Wall Street Journal arrived at the conclusion that, since 2007, “energy companies have spent $280 billion more than they generated from operations on shale investments.” Other analysts expressed the same concepts: you can extract oil from shales, but don't expect to make any money out of it. So, why are people insisting on pouring good money into bad wells? 

There are good reasons. The people who discounted the possibility of extracting tight oil were perfectly able to evaluate the economic convenience of the process, but they didn't consider that the "market" is an abstraction that doesn't always work, actually, almost never works. So, those financial entities that provide money for oil exploration are part of a mix of interests that include the oil industry, the aerospace industry, the military industry, and others. This mix is what keeps the US economy alive. But there would be no aerospace or military industries if the oil industry could not produce enough oil. 

It is impossible to say how the decision to pour immense amounts of money into tight oil was taken. Maybe it was a strategic decision taken by the military lobby in the US government (you may also note something curious: why was the US the only country that invested in shale oil extraction? After all, there are shale oil deposits in many other countries. I can think of an explanation, but I leave it to commenters to harp on conspiracy theories.) Or maybe the financial lobby recognized that they could survive losses in their investments in oil if these investments kept other sectors of the economy able to generate profits. Or, perhaps, it was a collective decision created by the great panic of 2008, when oil prices spiked up to 150 dollars per barrel. That event scared everyone enough to convince some of the key players that investing in oil was a good idea. In any case, with the second decade of the 21st century, the world changed.




The image above is by Michael Roscoe. It is not updated to the latest levels of oil production, but it shows how the US dominated the oil market (and the world), up to the 1960s. For a while, it was challenged by Russia and Saudi Arabia, but now the US is taking the lead again. Like all complex systems, the American Empire depended on the inflow of energy from the outside. So, it's not surprising that the Empire is striking back!  


One of the visible consequences of the return of the Empire is that it abandoned Afghanistan, which it had invaded 20 years ago in search of new oil resources in Central Asia. These resources turned out to be elusive, perhaps not existing, but the US stubbornly insisted on staying in the area. Then, with tight oil, the powers that be realized that the US didn't need those resources anymore. And that they could concentrate on juicier targets, moving aggressively to push its main competitor, Russia, out of the European gas market. The US is also behaving aggressively toward China, which it correctly considers its main long-term competitor. Whether this will lead to a war, is all to be seen. But it is energy that makes wars possible. 

But for how long will the shale bonanza last? As always, the future is obscure, but not completely. Shale oil remains a limited resource, no matter how often we hear that it will give us centuries of prosperity, or even that technology made it unlimited. After the Covid tsunami, shale oil production restarted to grow, but it has not yet reached the level it had in 2019. Also, its growth is clearly slowing down, while the Empire is facing new constraints in terms of overexploited resources: land, water, food, fertile soil, and more. 


Is tight oil going to peak again and, this time, forever? We cannot say. We can only say that the American Empire is following the ebb and flow of the resources that make it exist. Such is the power of energy, and empires are but slaves to the forces that govern the universe! 


 

 

35 comments:

  1. While it is true, that upon occasion, a person falls off a cliff we rightly suspect that such a tragedy is, often, preceded by a physical propulsion. In the first case a peculiar morbid fascination with chasms sets the stage. In the second case we acknowledge a more diverse set of motivations. Regardless, the terminal conclusion is a posteriori.

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  2. "and you may also note something curious: why was the US the only state that invested in shale oil extraction, even though there are shale oil deposits in many other countries? I can think of an explanation, but I leave it to commenters to harp on conspiracy theories.)"

    I have been thinking about this and the answer seems obvious: Dollar. The US do not bother with spending dollars as long as they can create it - and other countries are foolish enough to buy them. Sorry, no conspiracy theory here!

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    1. Well it just so happened that fracking took off with 0% interest rates, what are the odds? ;)

      Its funny, people don't seem to realize, but when you just print money and give it to your supporters of empire, you don't really need customers anymore do you?

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    2. Good point. There have been QE and also other financial tricks to support shale oil. Your consideration about customers is true too. I guess we will soon learn it, the hard way.

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    3. An extension of the exorbitant privilege. If the oil is produced close to break even, then essentially the US Government is printing energy, which no other government can do.

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    4. I recall Max Keiser stating that some shale deposits were being extracted even though they were unprofitable and they had a negative return on energy invested.
      ie. cost more than 1 barrel to get 1 barrel.
      I couldn't understand why at the time but in hindsight that malinvestment is based on money being thrown at shale, whatever the cost, to prop up the petrodollar.

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  3. Hello Udo,

    Great concept - "Seneca Rebound".

    It resembles me when I was a young party-goer, who at the end of the party felt that the alcohol promillage was going down, and ended the evening with a couple of stiff whiskeys, completely to no use except a heavier hangover.

    I think the graph is slightly misleading, since it shows the "top 5 oil producers in 2015", but the caption is worded differently . In this graph all countries are increasing extraction the last years, suggesting that oil extraction rates are typically going up.
    Many countries have been in the "top 5 oil extracters" (UK, Iraq, Venezuela, Norway) that are all on a much lower level today.

    Apr├Ęs nous, pas de deluge...

    Peace,
    Goran

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  4. Shale deposits that contain economic volumes of light (tight) oil don't tend to produce for very long. Economic "fracking" plays have so far resulted in fairly rapid depletion rates which occur over a matter of months not years as is the case of typical oil deposits. I look at this as extracting the last bit of Nutella in a nearly empty jar. I wish I had better news... looks more like a momentarily delayed Seneca swan dive in my humble opinion - time will tell - and very soon.

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    1. Blair Fix has made a few deep dives into this. One shows that opening new wells must be practically continuous. The latest shows the Canadian oil industry cannot cover its clean up obligations and is thus technically bankrupt. https://economicsfromthetopdown.com/2022/02/10/a-case-study-of-fossil-fuel-depletion/

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    2. With my colleagues, we are analyzing exactly those data. We hope to be able to extract the EROI of those wells from the production data

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  5. As the oil age ends, only China ( "The Dragons" in your prior sports analogy) seem to be using their energy to produce energy harvesting equipment like solar panels and windmills. Sigh.
    Art Deco

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  6. When Light comes from distant stars, its Particle form goes frozen in time - being traveling at the speed of light - so that part we don't see ever reaching Earth.

    We only see Light in its Wave form reaches our eyes coming from distant stars.

    Then after entering Earth, Light that's coming from distant stars remains a Wave but we have plenty of other Lights on Earth that are still in the form of a Particle and Wave - smart!

    Car manufacturers need to progress their Technology in same spirit...

    They modify their engines to run on shale oil (a very light, sweet form of crude oil) as-is, unmodified - straight from the well into the fuel tank of your car...

    Shale oil wells become street petrol-stations - if you like...

    Then we sell food and other supplies at those shale-oil stations - similar to today's petrol stations...

    Cannot humans make Technology turn and twist to people's spirit?

    What would take for that to happen - oil from Iraq, Syria, Yemen, Libya, Russia, Ukraine?

    Well, let it be - in the quest for building Technologies that turn and twist to people's spirit - why not?

    Light, switching between Particle and Wave doesn't require extra energy - it just happens like that...

    Using high pressure to fracture the rock that contains the oil - makes it possible for the liquid to flow to the surface" - it just happens like that - don't worry about nonsense sometimes said here and there:

    "No energy store holds enough energy to extract an amount of energy equal to the total energy it stores".

    Wailing.

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  7. In answer to the question about why there isn't fracking outside the USA I can report that in the UK fracking was on the cards but due to (valid) concerns about drinking water being contaminated and earthquakes it's been put on hold. Initially when the anti-fracking campaign started no politician seemed to want to have anything to do with it whereas now there is a very entenched opposition to it in parliament.

    I expect the next country to do fracking will be somewhere with poor human rights such as China or a weak country the USA can basically bully into allowing American fracking companies to work there. I hope it's not the UK, I like my drinking water.

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    1. As a good conspirationist, I wonder why Ms. Truss was fired immediately after having allowed fracking in UK.

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    2. While Rishi Sunak maintained the ban on fracking. I see the paw of the Reptilians, here.

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    3. "I expect the next country to do fracking will be somewhere with poor human rights such as China or a weak country the USA can basically bully into allowing American fracking companies to work there. I hope it's not the UK, I like my drinking water."

      Like the Ukraine?

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    4. South America is closer and shipping is going to become even more expensive and erratic. ArtDeco.

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    5. It feels strange to be on the same side as the reptilians. As far as I can tell Ms Truss was fired for screwing up the economy while the opposition put a motion through parliament to ban fracking which was a cunning way to force Conservative politicians to choose between voting against their own government or voting in favour of horrible unpopular fracking.

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    6. And yes Ukraine is certainly very dependent on the USA. Although perhaps the USA likes having Europe buying expensive American gas.

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  8. Slowly but ?surely? cold fusion is being developed. Even the US government realizes it is real. More money needs to be poured into "the Shoulders effect."

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    1. Could you explain what is the "shoulders effect"?

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  9. It's pretty simple...the best prospects for fracking have been largely exploited in the US, and production from the super expensive fracking wells is short-lived...Also, fracking production tends to be very light oil, not suitable for refining diesel, which is the most important fuel in modern economies...Hubbert's curve didn't consider fracking, because he assumed oil companies wanted to make money...

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    1. Good response with two very important points.

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  10. But Americans generally refuse to believe in the law of diminishing returns, so politicians talk about one hundred years of oil still in the ground...

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  11. I don't totally understand the claims of the energy independence lot...The US produces about 12 million bpd, and consumes about 19 million bpd...That requires a lot of imports...

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  12. Interestingly, it does appear that some countries are agonizing over the dilemma of conserving depleting reserves rather than completely tapping them out. The green arguments including the dubious climate change science and the "no more drilling" sound bites suggest to me that there is growing awareness that metering out what is left is wise for a number of reasons. Now what that means to markets when no alternatives of equal potential have been developed for transportation fuels etc.... that's another fascinating story of myopic leadership. Buckle up. Some people work really well under pressure, some do not. Lets hope the right people are in the right seats.

    “We have only two modes — complacency and panic.” James R. Schlesinger, 1977

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  13. Hubbert in the 1950's correctly predicted the peak of US conventional crude and those graphs also show where production is today, around 4mbpd. Again, in the 1970's Hubbert predicted the world conventional production peak, he stated 1995 but that it could be offset ten years from tampering with production. Amazing!

    99.9% of people don't care if you show them. Equally amazing. Every person I've ever told either incorrectly assumes human ingenuity will absolutely come up with a better alternative to oil, or they don't know what planet they're on and oil is just some dirty garbage we can do without.

    Distance of drilling through rock required to obtain oil-

    Conv crude = ------
    (decades of production)

    Shale = -----------------------------------------------------------------------------------------------
    (couple of years production)

    Allegedly a decade+ of shale oil left assuming special interests want to keep sacrificing other forms of energy to drill at a loss for the master resource. All while conventional falls lower and lower forever. The systems being held together with duct tape and gum.

    Humans will try to control other humans thru force in a permanently shrinking global economy = zero sum not fun game. Nothing new for humanity, just that it's on a global scale this time with inconceivable asymmetric high tech weaponry, let alone the good old fashioned bashing each other in the head with clubs.

    -Jeff Hendricks from the grave

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  14. A thought: we speak often of EROEI, energy return on energy invested. For example, the first coal-fired steam engine in commercial use was made to pump water out of a coal mine, to be able to get more coal. They burned coal to get coal. This is usually expressed as a ratio, amount extracted : amount used.

    But could it not be expressed as a subtraction? If 100t of coal are extracted by burning 1t of coal, the net coal extracted is 99t. If as the mine gets deeper it requires 10t of coal to get that 100t out, the net coal is 90t, and so on. In each case the gross coal dug up is the same 100t, but the net changes. And really we are not interested in simply digging up coal so we can burn it to dig up more (burn 100t to get 100t), but so we can do useful work with the net coal somewhere else.

    When we see oil (and coal, etc) curves like that in this article, we are presenting gross oil production.

    What would the curve look like if we presented net oil production? I would expect it to look more like Seneca's cliff.

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    1. This is an excellent comment. You are right that oil production is always gross bbpd. But of course much more difficult to track how much diesel, gas, coal is being burned by the energy companies, refiners et al in the running of their operations.

      Dr Tim Morgan is tracking surplus energy on his SEEDS blog, but rarely do you see this explicitly published.

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    2. Perhaps the most useful measure is the world's traded oil. I imagine it'd be an effort to track it all down, but as an example,

      "In 2021, the United States exported about 8.54 million barrels per day (b/d) and imported about 8.47 million b/d of petroleum"

      https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php

      - which indicates a bit of a shell game is going on, they're just shuffling things around to look productive. This shell game is also indicated by a related page about meeting the world's future oil needs, where they say,

      "Proved reserves are an accounting concept that is based on known projects, and it is not an appropriate measure for judging total resource availability in the long term. Over time, global reserves will likely increase as new technologies increase production at existing fields and as new projects are developed."

      So they're saying that we shouldn't just rely on proven reserves and actual technology we have now, but click our heels together and say, "there's no place like home, there's no place like home," and magically find our way to the Earth's creamy nougat centre of oil.

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  15. Our host wrote a piece on extracting "fossil water" that showed the same double peak in the charts as this one for oil. If cost is no object, then tech can keep production up for a while. ArtDeco.

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  16. Frac oil is unconventional oil. You can't (cheaply) make middle distillates like diesel. Gasoline, feedstocks for plastics but not diesel and the heavier products like asphalt.. You can sell it so you can buy conventional crude or dilute it with heavy oil but it is too light to use directly.

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  17. Argentina vaca muerta fraking

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    1. Still a long boatride to North America's refineries. Maybe Venezuela's conventional oil first, but we will get there eventually, IMHO. ArtDeco.

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