Gail Tverberg: The Shale Oil Boom is More "Mirage" than "Miracle"

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Gail Tverberg, is a professional actuary who applies classic risk assessment procedures to global resources: studying issues such as oil & natural gas depletion, water shortages, climate change, etc. She is widely known in the Peak Cheap Oil space for her reports issued across energy websites over the years under the penname "GailTheActuary".

In this week's podcast, Chris asks Gail to assess the merits of the shale oil "revolution". Does it usher in a new Golden Age of American oil independence?

With her actuarial eyeshade firmly in place, Gail quickly begins discounting the underlying economics behind the shale model:

We have to ask: At what price is the oil available? Is this shale oil available because prices are high and in fact, because interest rates are low, as well? Or is it available if it were cheap oil with interest rates at more normal levels?

I think what we have is a very peculiar situation where it is available ,but it is available only because of this peculiar financial situation we are in right now with very high oil prices and very low interest rates.

The shale oil plays are going to be probably much less than a 10-year flash in the pan. They are very dependent on a lot of different things, including low interest rates and the ability to keep borrowing - which could turn around very quickly. Lower oil prices would tend to do the same thing. But even if you hypothesize that we can keep the low interest rates and that the oil price will stay up there, under the best of circumstances, the Barnett data says they probably will not go for very long.

You know, when you take how long the payout really is on those wells, I think the companies drilling these plays have been very optimistic as to how long those wells are going to be economic. There was a recent study done saying just that: 10 years or 5 years; but certainly not 40 years.

And so these companies put together optimistic financial statements that have the benefit of these extremely low interest rates. They keep adding debt onto debt onto debt. How long can they continue to get more debt to finance this whole operation? It's not a model that anybody who is very sensible would follow.

Similar to many energy experts Chris has interviewed prior, Gail looks at the math and concludes that humans (especially those in the West) have been living on an energy subsidy that is beginning to run out. We have been living outside of our natural budget, and will be forced to live within what remains going forward. As a result, she expect great changes in store for the next several decades: socially, politically and lifestyle-wise.

Click the play button below to listen to Chris's interview with Gail Tverberg (38m:07s):

This is a companion discussion topic for the original entry at https://peakprosperity.com/gail-tverberg-the-shale-oil-boom-is-more-mirage-than-miracle/

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Risk assessment matrix. Competitive. Ghost money. The finite world. The economic unit. Limits to Growth. The War Machine.Overhead. Beans and sauerkraut. 
 

Merry Christmas Gail, I am so pleased that you have come to our site.

Where do you put us on this risk assessment matrix? 

When faced with a Gordian knot, one does not attempt to pick away at it. One strikes through it with a sward. 

I have long since given up obsessing about carbon or chemical energies. Nuclear looks dodgy. wind and solar are good at what they do. They might keep the internet alive. I hope so. What we need is something completely new, and we won't find it with more about what we know, about what we know. A classic Left Brain reaction. (Dr. Iain McGilchrist)

This competition meme has hairs on it. Forget the Nationalism and the Idealism, what is going to emerge from this (Given that we still have a planet) is a world government with a planned economy. If I have struck horror into your culturally conditioned heart then may I prescribe several doses of psilocybin. (Why do you think its illegal?) Communists have to drag themselves to work, just like Capitalists. They just get to retire earlier.

The printed money that has made it's way into speculation I think of Ghost Money. It is an appirition of wealth.

It is blindingly obvious the infinite growth cannot occur on a finite planet. The solution is equally as obvious. We have to leave the womb, quit the gravity well. How easy is that? Not very. Did someone promise you an easy option? You didn't pay him money, I hope?

Have you had a close look at the Limits to Growth, Business as usual, curves. Can you see the effects of the combined horrors of the twentieth century? They are reflected by the tiny squiggle.

(Given we have a planet to call Home. All the more reason to leave.)

Is the War Machine that you taxpayers are paying for money well spent? Do you get a good return on your dollar? Or is it just Big Boys Toys. I think that we can agree that The War Machine is an overhead.

Anyone can buy a macburger, but can you make beans, beer and sauerkraut? If so, do you need a neighbor?

Edit: I forgot the economic unit. Is the economic unit the middle class worker or the Giant corporation? Do people matter in today's economic models?

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Chris & Adam,
I've requested a podcast with Gail Tverberg in the past and you delivered.  I appreciate it.  Thanks again.

Nate

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Chris Martenson: Very interesting. Final question for you: You have been at this for a number of years, and I am wondering how the interest in and the tenor of the conversation has been over time for you.

Gail Tverberg: I think it kind of morphs as you go along. I think that – and it sort of depends on who you are talking to – I think that the financial people have not really understood that the oil situation is so closely tied in with their situation. I think there is a lot more feeling of this concern about the government financial situation now, but people have decided that maybe the oil situation is no longer a problem. They just do not realize what the connection is with the current financial situation.

Bolded sections my emphasis.

This is the crux of the problem. We have the "financial people", who cannot see, or refuse to look further than the next quarter or the next earnings report wielding tremendous influence in the political arena. They are joined at the hip with politicians who cannot see past the next election. As long as these people are in the drivers seat we will keep heading towards the cliff. The shale oil plays are a bit like taking a detour down another route just to see where it will go, but we will still arrive at the same cliff eventually.

So I guess the way I see it playing out is that it does go until it is forced. It is just really too hard to get any agreement by anybody of anything that would make any change in the timeframe that things would have to play out.
When it will be forced is the big question, as we have noted here many times. Using the time we have between now and then to make the necessary lifestyle changes will, from my perspective, prove to be the most valuable investment we can possibly make. Preparing for major change is far easier when one can see the change coming, as opposed to being blindsided by it.

Jan

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I second Nate's post. Gail has the ability to simplify complex interactions between energy, resources, finances, and government … just as Chris does. Just a wonderful podcast!
My biggest takeaway is that government influence will diminish out of necessity. 

Nobody really wants the current situation to change. TPTB will do everything in their power to keep the status quo. The smart thing would be to transition to the new normal, but anyone who suggests such an approach is considered an extremist. Instead, we have QE and government plans for expansion of services. We get the exact opposite of what we really need.

We'll stretch the rubber band until it breaks. Who could've seen that coming???

Grover

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Thanks for the great interview. I do have a disagreement with the discussion near the end of how it is government spending that is crippling the beast, and I’ll try to post another comment later addressing this. But right now, I wanted to bring up yeast. The more I learn about our energy situation, the more amazed I am at how closely we resemble yeast. A few years ago someone, on The Oil Drum I think, posed the question, “Are we smarter than yeast?” Well, based on our collective behavior over the last few decades, it turns out that we aren’t really.
It’s amazing and provides a lucid understanding of our world to view humanity through the lens of energy and a petri dish. It becomes painfully obvious that everything we do, basically, boils down to maximizing the rate of oxidation of complex carbon molecules into CO2 and water, in our immediate environments in order to accomplish useful tasks. That oxidation can happen either directly in the form of burning fossil fuels or biomass, or through metabolism of food in our bodies. This is where 98% of the world’s energy comes from, with the remaining 2% constituting the alternative energy forms like nuclear, solar and wind that everyone is pinning their hopes on for when we run out of fossil fuels, even though collectively we aren’t moving in that direction.

Whenever any new source of fossil fuels is discovered, or some “new” technology unlocks previously uneconomic fields (only brought on by high oil prices), the inevitable reaction by the media and the drones who follow it, is that this is further evidence that we do not have limits and that we should continue to burn more carbon molecules, because technology keeps making more available (except that with oil … it isn’t actually making more available; it’s merely maintaining a plateau of production).

Of course, the whole net energy return problem is completely ignored by the MSM and the masses. In fact, here in Canada, the net energy problem is actually being spun (by our opportunistic and predatory politicians who are oil men – Stephen Harper is actually an economist who worked for Chevron in the tar sands – that’s two strokes against him – Canada has no hope…) as a net energy opportunity. This is because as the world moves onto these more and more difficult oil sources like tar sands, more and more labour is required to turn them into the same kind of oil that used to squirt out of the ground by itself. As the economy stagnates from high oil prices, and other factors, our economy is finding opportunities for employment dealing with the reduced net energy problem. This is further evidence of how we as a society completely misunderstand our energy predicament, and how we are actually moving in the opposite direction of what we should be. And as long as those in power continue to gain power by this dependence, and as long as they continue to control the media and prevent a true understanding of energy from being gained by the masses, then the energy needs of the masses will be used to continue our dependence on carbon based energy.

The debate up here over this proposed Northern Gateway pipeline from Alberta to China is pretty intense. All the proponents of it spout off the predictable rhetoric of how the eco-freaks want to prevent economic “development”. Yet amazingly, no one, I mean no one, except myself, has even raised the question of how it is that the pipeline corporation Enbridge is proposing to export oil from North America when we already import 1/3 of the oil we consume! How could we possibly “develop” economically through exporting our oil, when “development” requires oil and we are already so short of oil that we have to import 1/3 of what we consume??? The fact that no one is even asking this obvious question speaks of the total ignorance towards energy issues, and to the total capture of the media by the big oil corporations.

Both yeast and humans are eukaryotes, meaning that we have double stranded DNA within a distinct cell nucleus. Genetically and metabolically, we are actually very similar. Believe it or not, but plants (and yeast, and single celled algae) are way more closely related to people than they are to bacteria. Apparently that similarity goes all the way to the programming of our brains too, and how we interpret energy, resources and the world around us.

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We are giving ourselves airs and graces, comparing ourselves to yeast!
Scientists in Russia found out what what were the minimum requirements that yeast needs. They then scrumptiously add all the elements except for one.

They grew yeast in that environment. Then they analysed the results and the atomic element that was left out was there. 

So, either your model is correct and the Russians are being unkind, or yeast can transmute elements that they need. 

We on the other hand are blinded by our brilliance.

Food for thought as you drink your beer.

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It was interesting and pleasing to read the transcript and hear this podcast. For about five years I have followed Gail Tverberg's posts when she was a contributing editor of The Oil Drum, and more recently, on her own blog, Our Finite World. She writes concisely and her writing is always interesting to those of us who like well researched arguments. "Gail the Actuary" understands the exponential function, as one might reasonably expect of someone with advanced mathematical training (but this expectation is not always met, sadly. Something that is obvious will not be understood by someone whose salary depends on not understanding it, as it has been said). The late, great Dr. Albert Bartlett famously said that the greatest failing of the human race is failure to understand the exponential function. He gave his famous lecture, "Mathematics, Population and Energy" some 1,900 times. It should be part of every college freshman's core curriculum. This obsession with growth is insane.
Our Finite World posts have a pessimistic tone on the surface, but they are realistic. Having devoted perhaps a couple of thousand hours of serious research and study to the issues over five years, I have parsed it all down to a two word executive summary: we're screwed.

 

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I have the greatest respect for Gail's work and courage to shed a light on a very unfashionable point of view.   Decades ago the actuarial profession adopted a quote by John Ruskin as their motto: "The work of science is to substitute facts for appearances, and demonstrations for impressions."  Gail has truly lived up to that standard.
 

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The problem of thermodynamic limits isn't totally out of the mainstream thinking, I am glad to see. A very popular music band has made a very successful album around the topic. It is a favourite of mine and my friend. But when I raise the issue with my friend he finds a way out of having to come to terms with it. "That's way off in the future". He'll listen to it from a band but not from me, even though I'm full of more facts and statistics than he could possibly ask for. He won't even entertain the notion that things are unraveling right now. That's how successful QE has been at placating people and maintaining the illusion of normalcy.
I don't know who Muse consulted for this but it's an eerie and accurate representation of what the laws are all about. I like to think it was from blogs like this one or The Oil Drum. I think there's also a bit of testosterone at play as well with our unwillingness to accept these laws. Historically we have always been able to "figure it out", or muscle our way through it, as long as we applied ourselves and worked really hard. The problem with thermodynamics is that working really hard won't get you anywhere. It just uses up lots of energy and makes the situation even worse.

http://youtu.be/EF_xdvn52As

http://youtu.be/VXPoJAyeF8k

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Thanks for an outstanding conversation! It has been hard to keep up with all of the great articles and podcasts being shared at PP recently, and it was certainly very engaging to hear from Gail Tverberg.
I have a question about oil prices.

In her recent blog article, What's Ahead? Lower Oil Prices, Despite Higher Extraction Costs, Tverberg sees real oil prices going down due to a number of negative feedback loops including:

1. Wages stagnate as oil prices rise, tending to slow economic growth

  1.  Consumers cut back on discretionary spending b/c of higher cost of food and oil, leading to more layoffs and recession

  2. Higher oil and food prices together with stagnating wages lead to cutbacks in spending for new cars and homes, falling prices for new homes, defaults on home and car loans, and banks in need of bailouts.

  3.  Cutbacks in consumer debt combined with flat wages appear to have led to the decline in spending that precipitated the July 2008 drop in oil prices.  Consumer debt still remains depressed.

  4.  Even after high oil prices have been in place for several years, many governments find themselves trapped by the need for deficit spending and ultra-low interest rates to cover up problems with stagnant wages and inadequate demand for homes and cars at 'normal' interest rates.

  5.  Rising prices of oil have contributed to long term inflation.  If oil prices start falling, this tends to create the opposite problem-deflation.  Once oil price deflation starts it may lead to a self-reinforcing debt-default cycle.  (Source)

If I understand Tverberg correctly, she is taking the deflation side of the classic question of whether our current economic predicament will manifest as basically inflationary or deflationary.  An image of a contracting, deflationary economy seems consistent with an industrial contraction due to fossil fuel depletion.

On the other hand, while he may not be completely in the inflationary camp, Charles Hughes Smith, in Get Ready for Rising Commodity Prices, argues that oil prices will tend to rise simply due to the hot money effect of QE.  

On a more general level, it's hard to see how supply constraints do not lead to higher prices, since this is how supply and demand tend to work, all else equal.  This is all the more compelling when one considers the massive amount of energy contained in every barrel of conventional crude (~25,000 hours of human work).  How on earth could the oil price not be bid up very high indeed when each barrel supplies so much energy?

So, it's hard for me to accept Tverberg's position that oil prices will tend to go down from here, but I feel in no way sure that they will rise, as her arguments for deflation seem solid.

If I have to put my foot in one camp or the other, I would cheat and keep my feet in both by saying that stagflation will be the dynamic of the future, and that while commodity prices - certainly including oil - will rise, the economy as a whole will contract.  Along this line of thinking, as long as all-in EROI of oil doesn't fall below the critical tipping point (10:1? 5:1? 3:1, as depicted on the graph? 2.5:1?  2:1?), then oil prices should continue to rise, but maybe after that they will fall as oil simply recedes from being the leading energy source for our global industrial civilization to being much less important.  Here is Figure 15.3 of the book version of Chris' Crash Course. 

It seems to me that oil prices will continue to rise until the global net energy return of oil has slid a little further down the steep edge on the right side of the graph, but I don't know how far.  Also, it seems that in some parts of the world, such as Saudi Arabia, they will be producing and using oil for much longer than most of the rest of the world will, so perhaps as transport costs rise, our global use of oil will become more heterogeneous, with places like KSA, Russia, and Canada using significant amounts of oil for far longer than places like Japan or Spain.

But, in the end, I'm really stumped by the question of whether or not real oil prices will go higher or lower, especially after reading Tverberg's article and hearing this podcast.

A few weeks ago, in one of my classes, we posited some conditions under which a belief in limits to growth due to peak-oil-related issues would be proven wrong.  In other words, what type of evidence would falsify the hypothesis about future limits to growth due to fossil fuel depletion?  The answers we came up with were 1.)  if the real price of oil fell for a sustained period of time  2.)  if the EROI on fossil fuel projects started to level off or even increase, instead of falling  3.) if real economic growth increased for a sustained period of time despite higher oil prices and falling EROI on oil

But, Tverberg - who clearly believes in a future constrained by limits to growth - sees oil prices falling. So, now we might have to take a second look at the conditions under which peak oil theory and its ramifications for limits to growth would be falsified.  

Cheers,

Hugh

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I don't see it as a simple deflation / falling oil prices vs. inflation / rising oil prices scenario. We will probably get both. Hyperinflation and deflation are basically the same thing, with the difference being that the shortage of money in a deflationary scenario is replaced with piles of worthless cash until things get so bad that people lose confidence and prefer things over money and then money velocity increases…The thing about the deflationist argument is that we may indeed get deflation for a while, but the effects of crashing the global ponzi scheme would be so horrible, they are hard to imagine. I don't think deflationists fully think through the ramifications of what a deflation would entail. It would be the end of the current system of world order. We can't just have "a little bit" of gradually worsening deflation and expect the world to continue functioning more or less as it does now but with everyone just a little bit worse off than now; it doesn't work that way. Yes, prices may drop for a while but in short time the average person would not care less about acquiring dollars, they will be fighting tooth and nail to stay alive, to acquire food and energy. That is what will increase the velocity of money, along with the inevitable money printing that will go along with this, since no government with a printing press will allow that to happen, so they will print. This is what will lead to hyperinflation as the final kicker, whichever way we get there.
I would agree with you that we will probably stay in a stagflationary environment (even though the official government statistics will not admit to it) for a while until something finally breaks and we get the deflationary crash that leads to hyperinflation, or we go straight into hyperinflation. I hear talk about how we may go to a cashless society in order to prevent people from running the banks and to keep the velocity of money low, but I can't see that working. In that type of scenario where things are falling apart the internet will not be reliable and there would emerge a black market for paper dollars and anything else monetary like PM's. The best way to get people to want to buy PM's is to take away cash, and see what happens anywhere that has an internet failure.
I think the only evidence that we are escaping limits to growth would be if we found another planet full of oil; barring that, if we started making headway with renewables so that they contributed a large portion of our energy mix. But that isn't happening.

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Gail's comment about the cost of government under Monarchy was both interesting and very funny for a Modern.

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Hugh,I also read Gail’s blog last night and I was wondering the same thing, how can oil prices go down if the oil supply goes down?
The only answer I can come up with would be if real GDP drops even faster than oil production.
The case for higher prices assumes that the economy will always demand more oil than production can sustain. But Gail’s point as I understand it is the economy cannot function with high energy prices. So if it can’t, it won’t happen.
On the other hand if the economy cans only work at lower prices, then this is what we’ll have in average. This would be only possible if GDP decreases in average at the rate of oil production or even faster. It would mean that the oil supply would be larger than demand and the economy would be incapable of using the extra supply.
Of course if we have massive inflation, the absolute oil price could continue to increase but could still decrease in real terms after price adjustment for inflation.
Fred

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I had the good fortune of hearing Gail speak at the Age of Limits conference this past May.  We also spent a bit of time conversing between sessions.  She's a kind, intelligent and clear-eyed thinker and I appreciate that you brought her on.  

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[…] Miracle Disappears” and immediately preceding that one is an article by Gail Tverberg “The Shale Oil Boom is More Mirage than Miracle” from 2013. Similar wisdom on the same site from Art Berman from 2015. Earlier YouTube videos […]