For the last decade there has been growing concern among petroleum geologists, energy specialists, the Defense Department, investors, and environmentalists over the radically rising price of oil. A 44 gallon barrel of oil that sold for $12 in 1998 is going today for $95, and that understates things, as that is the American, or West Texas Intermediate, standard. This is what many in the Midwest pay, but on both coasts and much of the South, oil is going at the European Brent price, which is now at $111 per barrel.

Unlike climate science, where the professionals have reached overwhelming consensus that global warming is caused by human use of fossil fuels, the constituencies concerned with America’s energy prospects remain divided. Those who think this finite, precisely “fossil,” material is running short of world demand are proponents of the peak oil thesis. They advocate strict conservation of fossil fuels and crash investment in energy efficient technologies and renewable energy sources. Their opponents call them doomsters, while the peak oilers refer to the deniers as cornicopians. The cornicopians maintain that there are large enough untapped resources still in the ground to delay indefinitely any need to change our high energy standard of living or our economy, which depends on perpetual growth. They got a huge boost last fall when the prestigious Paris-based International Energy Agency, the 28-nation consortium that reports to the Organization of Economic Cooperation and Development, on November 12 released its World Energy Outlook for 2012, predicting:

“By around 2020, the United States is projected to become the largest global oil producer (overtaking Saudi Arabia until the mid-2020s) and starts to see the impact of new fuel-efficiency measures in transport. The result is a continued fall in US oil imports, to the extent that North America becomes a new oil exporter around 2030.”

What had changed from the long decline in American oil production since the early 1970s was the fracking boom in tight oil in North Dakota and Montana.

The Wall Street Journal ran an editorial headed “Saudi America,” airing Republican talking points venerating fossil fuels: “This is a real energy revolution, even if it’s far from the renewable energy dreamland of so many government subsidies and mandates.”

These kinds of heady promises produced lots of headlines to the effect that peak oil is a dead idea for at least the next generation and possibly for a century to come. Before we abandon renewable energy and start to binge spend on the promised new oil wealth we should remember that deals that look too good to be true usually are.

What the IEA Report Did and Didn’t Say

Even the most authoritative of the mainstream press made gross mistakes in what they claimed the IEA’s World Energy Outlook for 2012 said, always on the side of presenting a more positive picture of U.S. energy prospects. Richard Gilbert in the November 21, 2012, Toronto Globe and Mail lists several of these.

The Wall Street Journal said that U.S. current domestic production is about 18 million barrels per day (mbd) now, will rise by 2022 to 23 mbd, and that U.S. imports are currently 20 percent of its consumption. In fact U.S. crude oil output hit 6.5 mbd in 2012 and imports are running at 56% of consumption.

(Another set of figures come from a December 28, 2012, Dow Jones newswire. This says that U.S. crude imports in October 2012 were 8.091 mbd with domestic production at 6.820 mbd, this last an increase of 935,000 mbd from the previous year.)

The Washington Post said the U.S. will be almost self-sufficient and will become a new exporter by 2035. The New York Times had the U.S. becoming a new exporter by 2030.

The IEA actually said that North America as a whole would become a net exporter by 2030, while America would still be importing 30% of its oil indefinitely. And to get that close, the IEA’s chief economist, Fatih Birol, at a London press conference cited by Gilbert, said that 45% of America’s expected reduced imports would be the result of improved conservation, while the IEA’s projected American increase in oil output by 2035 is only 14%. Gilbert calculated that to meet the energy efficiency standard the IEA is expecting “would require per-capita oil use to fall by more than 40 per cent, which would represent astonishing changes in how people and goods move in the U.S.”

Kjell Aleklett, professor of physics at Sweden’s Uppsala University and president of the Association for the Study of Peak Oil and Gas (ASPO), offers an excellent analysis of World Energy Outlook 2012, released by ASPO International November 29, 2012. He stressed that the IEA report does not say that the U.S., as opposed to Canada and Mexico, will become self-sufficient in oil. It did say that the United States would, briefly, overtake Saudi Arabia, but this claim needs some unpacking.

On one side, it rests on a drastic and ominous decline from the IEA’s prior estimates of Saudi Arabia’s contribution to world oil supply. In their 2004 World Energy Outlook the IEA had predicted the Saudi’s in 2030 would be pumping 22.5 million barrels a day. Now they have scaled that back to only 12.3, and in the period between now and then, only in the high 10s. Given that total world crude output today is around 68 mbd that is an enormous setback. The year where the U.S. is supposed to out-produce the Saudis is 2020, where the IEA expects Riyadh to come up with 10.6 mbd, with the U.S. slightly ahead at 11 mbd. There is a little trick in this number, as the Saudi’s are turning out real crude oil, while the projected American figure is for all liquid hydrocarbons.

Counting all hydrocarbons as “oil” misrepresents what they can be used for, but also significantly overstates the total energy content. U.S. totals include between 25 and 28% natural gas liquids (NGLs). NGLs refine into propane, butane, and similar fuels, good for heating but not usable to run automobiles except for a small number of specialty fleet vehicles. Natural gas liquids, apart from their limited uses, have only 70% of the energy content of crude oil. The same is true for ethanol.

Ted Patzek, chair of the Department of Petroleum and Geosystems Engineering at the University of Texas at Austin, breaks down U.S. hydrocarbon output as follows, using the figures for 2011 provided by the U.S. Energy Information Administration. The EIA reported that total crude oil produced by the United States for 2011 amounted to 5.7 mbd, including fracked oil from the Bakken and Eagle Ford shales. The EIA claimed a total of 10.3 mbd of all “hydrocarbons.” Patzek lists the components of this 4.6 mbd of other “oil.” Some 1.1 million barrels a day is refinery gains. This is a form of double counting. When crude oil is refined into gasoline, which is a much thinner liquid, it expands, like adding water to a thick soup. It doesn’t increase the total amount of oil, but is counted as though it did. Next comes corn ethanol, technically not a hydrocarbon at all, which adds .9 mbd. Patzek writes:

“Basically, ethanol is obtained from burning methane, coal, diesel fuel, gasoline, corn kernels, soil and environment. We destroy perhaps as many as 7 units of free energy in the environment and human economy to produce 1 unit of free energy as corn ethanol, and make a few clueless environmentalists happier and a few super rich corporations richer.” He adds that “your mileage would drop by 33% if you were to use pure ethanol as a fuel for your car.” And by diverting human food to car fuel the price of corn is driven up, increasing hunger and the risk of starvation in poor countries. (http://www.theoildrum.com/node/9619)

The remaining 2.6 mbd of “other oil,” 25.2% of total U.S. hydrocarbons, is natural gas plant liquids, which cannot be used for transportation fuel for ordinary cars and trucks.

Another reason the comparison is misleading is that the Saudis claim to have a reserve of about 2 mbd that can be used as an emergency source to stabilize world oil prices. The American output is not even all oil and has no such reserve. In any case the IEA sees the U.S. putative supremacy as very short lived, with the Saudi’s in 2035 pumping 12.3 mbd while the United States has declined back to 9 mbd. And of that amount, Aleklett adds, “Around 50% of the USA’s crude oil production in 2035 is to come from fields yet-to-be found.”

The graph below was published by the U.S. Energy Information Administration in 2009. This was before the current increase in tight oil, which to date amounts to only 1.5 mbd, 8 percent of U.S. consumption and 1 percent of world consumption. But by official government estimates U.S. tight oil will reach no more than 3-5 mbd in the 2020s, equal to 4 or 5% of world demand. The source of the remaining 43% shortfall is still unknown.

Kjell Aleklett summarizes the IEA predictions for 2035 and then critiques them. Current world liquid hydrocarbon production is 84 mbd, of which 68 mbd is crude oil, the rest NGLs, tar sands, and heavy oil from Venezuela. The IEA predicts that global crude oil will decline to 65 mbd in 2035, while overall liquid hydrocarbons will rise to 97 mbd, the 32 mbd difference made up entirely of nonconventional liquids. (Non-conventional refers to the methods of extraction and processing, not to the ultimate product. Fracking tight oil from shale produces real crude oil; heavy oil from Venezuela is not real crude and must be heavily processed to be used as such; natural gas liquids, a byproduct of fracking for both gas or oil, never becomes crude oil but ends as more limited-use hydrocarbons.)

Aleklett challenges this on several points. He is particularly dubious of their projection that crude oil will deplete by only 3 mbd. The IEA has the non-OPEC world (Europe, Asia, the Americas except for Venezuela) essentially flat through 2035, at around 50 mbd of all hydrocarbon liquids. But the mix within that amount is marked by a massive loss of crude oil, to be replaced by non-conventional liquids. The total loss is 40%, leaving the non-OPEC bloc with only 19 mbd of crude, a decline of 13 mbd from today’s levels, and even to get the 19 will depend on large increases from current levels in Brazil and Kazakhstan. The sharp declines will come mainly from Russia, down about 2.25 mbd; China, down 2.1; the U.S. and UK down about 900,000 bd each; and slightly smaller losses from Canada, Norway, and Mexico.

How, then, to hold the global decline to only 3 mbd and end with 65 mbd in 2035? The IEA looks to OPEC to increase its ordinary crude by 10 mbd, from 36 to 46 mbd. This is supposed to come mainly from Iraq, which they foresee adding 5.3 mbd in output between 2011 and 2035.

Aleklett thinks that unlikely. Iraq has not achieved the stability to count on such a large boost in output, while the other half of the prediction has to come from existing fields in other OPEC countries. He points out that the majority of new oil fields discovered in recent decades have been in non-OPEC countries, where the IEA is expecting a 40% decline, while OPEC, working with old giant fields that have been in production much longer, not only do not suffer from noticeable depletion but are tasked with coming up with a 28% increase. He writes:

“That we will see declining production outside OPEC and increasing production inside OPEC during the next 25 years is not logical. Once again we see the IEA telling a fairy stale about OPEC that lacks any foundation in reality.”

At least one U.S. government agency, the National Intelligence Council, in its Global Trends 2030, released in December 2012, prophesied that oil from fracking alone would be so plentiful that by 2020 there would be “a production breakeven price as low as $44-68 per barrel depending upon the fields.” This startling claim is based on some rather extraordinary expectations for tight oil output. I will return to that.

One major Wall Street firm, Bernstein Research, challenged the idea that tight oil is going to result in any lower oil prices, much less the half-price sale the National Intelligence Council is hoping for. In a 180-page September 11, 2012, report, “Global Oil Prices: At ‘Base Camp’ Before the Final Ascent,” their analysts projected that Brent oil would hold steady at around $113 a barrel through 2015, then escalate to $158 in 2020, with U.S. West Texas Intermediate only $5 lower. A Reuters summary said “new supplies are too small to meet emerging market demand growth. By 2015, shale oil is forecast to constitute just 3.2 pct of global supply, up from 1.5 pct now.” And in a direct quote from the Bernstein report:

“Emerging market demand is still robust, rising with higher wealth and mobility; in developed markets the role of fuel economy in demand destruction is overstated; conventional non-OPEC supply is increasingly mature; OPEC capacity growth will likely lag its required rate.” Bernstein estimates breakeven costs for new oil wells for the 50 largest publicly traded oil companies at $92 a barrel. Canadian tar sands breakeven is $100, and even OPEC oil production cost is $94 a barrel and rising fast. Those are costs before refining, transportation, marketing anddistribution.

How Much Oil Can They Squeeze from the North Dakota Shale?

The IEA is bullish not only about holding world crude deliveries to a minimal decline, but even more so in their expectations for non-conventional hydrocarbons, which would have to increase by 16 mbd to meet their postulated 97 mbd global liquid totals.

The main candidate to replace declining conventional crude is tight oil. Conventional oil, by definition is found in liquid form in porous rocks from which it can be simply pumped. It has been on a plateau since 2005, and the IEA, as we have seen, expect it to decline from there.

Tight oil, as well as shale gas, is found in shale rocks from which it is unable to flow. Richard Vodra in the January 2, 2013, investor newsletter Advisor Perspectives describes the process:

“Shale is a very solid rock that forms numerous thin layers. When gas is present, it is found in pores barely larger than a single gas molecule. Oil engineers have combined several technologies developed over decades to drill horizontally along a shale layer, rather than vertically through it, and to apply a high-pressure mix of water, chemicals and sand through holes in the drill pipe to shatter, or fracture, the shale, allowing the gas or oil to move to the pipe and up to the surface. Fracked wells in oil country commonly produce a mixture of oil, gas, and natural gas liquids.”

Given the extraordinary weight given to this source in hopes for America’s oil future, the two principal agencies that study these matters each have important reservations about the available data. Energy securities analyst G. Allen Brooks in a November 21, 2012, posting to Rigzone.com writes:

“Fatih Birol, the IEA’s chief economist, said his agency’s forecasts to 2017 were based on data about existing reserves and production. He warned that the geology and reservoir performance of the oil shales were ‘poorly known’ and he said it was unclear whether new reserves would be found to sustain production levels, let alone grow them. This is a critical consideration that underlies all the bullish forecasts for a new petroleum age for North America.”

Brooks notes the very steep decline rates of fracked gas wells compared to conventional oil and comments that “The IEA has conducted extensive research into oilfield decline rates in the past, but we sense little of that research was brought to bear in this study. . . . there are enough qualifiers to the assumptions underlying this long-term forecast to cast doubt on how firmly to embrace the report’s conclusions.”

Similarly, representatives of the American branch of the Association for the Study of Peak Oil and Gas held a December 17, 2012, meeting with senior officials of the federal government’s Energy Information Administration. In their December 24, 2012, ASPO USA Peak Oil Review they report:

“Of relevance to our concerns, we learned that the EIA information on drilling costs and other costs of oil and gas production may not be very robust. Their projection models, therefore, may grossly underestimate the significance of increasing production costs as a constraint on oil or gas supply. EIA’s projection models seem to be more demand-driven than supply-driven in general. . . . Perhaps most importantly, we learned that EIA’s interaction with and input from experienced experts in technical oil and gas issues may not be as regular and rigorous as it should be.”

The National Intelligence Council’s Global Trends 2030 is the most optimistic projection I have seen, claiming that for oil from fracking alone, apart from ordinary crude or deep sea drilling, “Preliminary estimates for 2020 range from 5-15 million barrels per day.” An accompanying graph is even more exuberant, proposing a range for tight oil output in 2020 between 12 and 19 million barrels a day, the high end more than twice Saudi Arabia’s output for November 2012 of 9.5 mbd.

This kind of hype is prevalent in the press. In fact the upturn in U.S. oil output, due almost entirely to fracking tight oil, restores only a fraction of the decline that set in around 1972. Oil totals then were almost 10 mbd while today, after adding about 1.5 mbd from fracked wells, it is still at only 6.5 mbd.

Richard Vodra, in the article cited earlier, suggests some reasons this rosy picture may be far from the mark:

“Two aspects of shale production make it radically different from conventional production. First, it takes a lot more energy (including many miles of steel tubing per well, for example) to extract energy out of these wells. Traditional wells have a ratio of energy returned on energy invested (EROI) of 10- or 20-to-one, or an energy cost factor of 5 to 10%. The EROI with fracking is in the range of 5- or 10-to-one, or a cost factor of 10 to 20%. Professor Charles Hall of the State University of New York, a recognized expert in the field, claims that modern civilization will have trouble functioning with an average EROI under 10-15, so shale oil and gas alone could not support our civilization at its current standard-of-living. EROI roughly correlates with financial cost, and the typical fracking oil well in Texas now costs over $10 million to drill, compared to less than $1 million for a conventional well.

“The other thing about extraction from shale is that it ends quickly. A conventional well’s production declines at about 5-8% per year, and it can remain productive for decades. By contrast, the first-year decline in shale wells is over 60%, and about 90% of a well’s production occurs in the first five years. That creates a ‘drilling treadmill,’ as new wells are needed simply to replace production from wells drilled a few years before.”

Even the treadmill only works if there is a very large physical area in which to keep drilling the wells. The total area of the Bakken Shale in North Dakota, Montana and Saskatchewan; the Barnett and Eagle Ford plays in Texas; and the Marcellus in West Virginia, New York, and Ohio are geographically vast, but drillers are discovering that only relatively small “sweet spots” within them produce significant output. Chemist Roger Blanchard in a November 11, 2012, post on the Resilience website cites data showing that in June 2012 80.8% of total Bakken output was coming from just four of North Dakota’s 53 counties, while Bakken output in adjacent Montana has been in decline since 2006. In Saskatchewan it was flat for a decade from 2000 to 2010, followed by a 2.2% rise in 2011.

Stuart Staniford, physicist and chief scientist at the web security company FireEye, writes on the Early Warning blog spot:

“I am less persuaded myself that using a thousand oil rigs to generate an extra one million barrels per day of oil is necessarily a sign of a large and long-term sustainable increase in US oil production (as opposed to, say, frenzied scraping of the bottom of the barrel).” (November 12, 2012)

Tom Whipple, who writes regularly on oil issues, in his December 12, 2012, column in the Falls Church News-Press (Falls Church, Virginia) reports on the just-concluded annual conference of the Association for the Study of Peak Oil and Gas in Austin, Texas:

“There are now about 5,000 wells in North Dakota, one of the two major tight oil production ‘plays’ that are pumping out an average of 143 b/d for each well or some 700,000 per day. Our speaker’s well-by-well study of the first 2500 wells in the Bakken discussed at the conference, however, concluded that this production would drop by 38 percent within a year unless more wells were drilled. At these depletion rates, it will take 1,600 new wells per year just to stay even. In the most recent 12 months of drilling available some 1750 new wells came into production in the Bakken – leaving very few to increase production.

“If we assume that the decline characteristics are similar in other tight oil formations, then if production were ever to reach 3 million b/d, well over 1 million b/d of production would have to be replaced through new well drilling each year to maintain production. For this reason, the skeptical presenter at the Texas conference estimates that tight oil production in the U.S. will only reach 1-2 million b/d by 2020 – depending on price – as compared to the 4 million b/d forecast by the optimistic presenters.” No one but the people at the National Intelligence Council are mooting numbers past 4 or 5 mbd.

James D. Hamilton, writing in the November 15, 2012, issue of the UC San Diego Department of Economics journal Economics in Action, shows that for both the United States and the broader world the more or less steady rise in crude output from the mid-nineteenth century to 2005 depended overwhelmingly on the continual opening of new areas of exploration, far more than on improvements in extraction technology. The 113-year rise in total U.S. oil output from 1859 to 1972 appears on a countrywide graph as though wells were good for more than a century of increasing volume, presumably boosted by increasingly sophisticated technical innovation. This is not true. The initial wells were in Pennsylvania in the Oil Creek District. These peaked in 1874. Ohio peaked in 1896, West Virginia in 1900.

Total national output kept rising as exploration kept moving west. But even there, of the four most generously endowed states, Oklahoma peaked in 1927, Louisiana in 1971, Texas in 1972, and California in 1985. Hamilton points out that despite the new tight oil gains in North Dakota and Texas, “oil production in 2011 was still less than 60 percent of what it was in 1970. And a key unknown is how quickly production is likely to decline after the initial surge. The North Dakota Department of Mineral Resources estimates that production from a given fracking well will decline 80 percent within two years of initial production.”

Hamilton sees a similar story at the world level, where drastic declines at the end of the 1990s were temporarily offset by new finds in the North Sea and Mexico, while today “the North Sea is now only producing at about half of its 1999 level, and Mexico is down 25 percent from its peak in 2004.” The current plateau, which has held steady since 2005, is now resting on finds in central Asia, Africa, and Brazil, and after that, promises from Iraq. The rapidity with which similar large fields have depleted and the large part of the globe already in decline, combined with the far more rapid depletion rates for fracked oil, lead Hamilton to see only a short future for current output levels:

“Optimists may expect the next century and a half to look like the last. But we should also consider the possibility that it will be only the next decade that looks like the last.”

So now let us look more closely at the International Energy Agency’s projections for America’s oil future through 2032. As their graph above shows, conventional crude, at around 5.7 mbd in 2012, will decline to a bit more than 4 mbd by 2032. Some 2.2 mbd will be natural gas liquids that do not convert to gasoline, while an optimistically large portion depends on extending the current rate of increase in tight oil uninterrupted to 2020 before it begins to decline, peaking at a little under 4 mbd.

If we set aside the natural gas liquids as special purpose products, even the hoped for peak in 2020 would be just 9 mbd useful for transportation. If the IEA’s admittedly uncertain numbers for tight oil prove to be high, the usable 2020 production for transport would fall to less than half of current daily consumption, any improvement over that dependent mainly on government efforts to prod auto makers to scale up fuel efficiency.

The IEA’s global figures also need to be scaled back. Apart from skepticism about volumes of tight oil, rates of decline, and other grounds to lower their estimates, the most indisputable is the World Energy Outlook 2012‘s treatment of hydrocarbons with lower energy content as the same as actual oil. Antonio Turiel, staff researcher at the Institute for Marine Sciences of Barcelona, in research reported in the January 3, 2013, Reliance website, recalculates the IEA’s own figures for 2035, correcting for the fact that liquefied natural gas, bitumen (Canada’s oil sands) and ethanol “have a gross energy content per unit volume that is approximately 70% of conventional crude oil, and, for this reason must be counted in terms of ‘equivalent barrels.'” This is also true of tight oil in the sense that while the end product carries the same energy as conventional crude the energy used to extract and process it must be counted as an energy cost against it, putting it in the same category as far as net energy goes. Turiel presents two graphs, the first, the IEA’s own projection for 2035, the second, the same data adjusted for actual comparable energy content:

 

 

To have effective energy of only just under 70 mbd when you had counted on 97 is a shortfall of almost 28 percent.

Prospects for Shale Gas

The issues around shale gas are different from those for oil. This material is not a substitute for crude oil, and cannot be made into gasoline to run cars. It is a principal energy source for generating electricity and for heating. But supply is currently outpacing demand, due to what is called “dry gas” fracking, which has created a glut that has tumbled prices. Unlike oil, which is easily transportable and therefore priced at the world level, natural gas is localized. It can only be exported by pipeline or by the expensive process of liquefaction at ultralow temperature. U.S. (natural) gas prices started to inflate around 2000 from under $3 a thousand cubic feet (tcf) and reaching $7-10 in 2008. Then, as fracking expanded, in 2012 prices fell to under $3 for most of the year. Today shale gas provides 25 percent of U.S. natural gas consumption and is being promoted as a reliably available and cheap energy resource for utilities and manufacturing.

Expecting, mistakenly, that they can count on these low rates indefinitely, utility companies and factories are in process of massively converting from coal, and some from oil, for generating electricity and for heating. The press frequently opines that there is a century of plentiful and low-cost natural gas, and it is even being considered as an alternative to gasoline to fuel automobiles, which would require a massive retrofit of the country’s gas stations and automobile design. (In fact, only liquefied natural gas, with its requirement of constant refrigeration, can match ordinary gasoline for driving range. Simple compressed natural gas has very limited range, more like that of electric vehicles.)

The New York Times in mid-2011 began to raise red flags about the economics of shale gas production, saying they had uncovered “hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells” that cast serious doubts on the industry’s viability:

“In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves. Many of these e-mails also suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles.

“‘Money is pouring in’ from investors even though shale gas is ‘inherently unprofitable,’ an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. ‘Reminds you of dot-coms.’

“‘The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,’ an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.” (June 25, 2011, NYT)

The Times cites data for more than 10,000 wells that reveal a pattern of a few high-producing wells “often surrounded by vast zones of less-productive wells that in some cases cost more to drill and operate than the gas they produce is worth. Also, the amount of gas produced by many of the successful wells is falling much faster than initially predicted by energy companies, making it more difficult for them to turn a profit over the long run.”

Rolling Stone ran a major expose of the shale gas industry in its March 1, 2012, issue, titled “The Big Fracking Bubble.” It profiles Aubrey McClendon’s Chesapeake Energy Corp., which right-wing owner McClendon boasts is “the biggest frackers in the world.” McClendon funded the Swift Boat attacks on John Kerry, was a big donor to Rick Perry’s presidential campaign, and pumped $500,000 into efforts to make gay marriage illegal. Inconsistently, he voted for Barack Obama in 2008, but not in 2012.

A clue about the real value of fracked gas, as Rolling Stone puts it, is that for Chesapeake Energy, “the primary profit in fracking comes not from selling the gas itself, but from buying and flipping the land that contains the gas. The company is now the largest leaseholder in the United States, owning the drilling rights to some 15 million acres – an area more than twice the size of Maryland. McClendon has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil.”

As an example, in 2010 Chesapeake made $2.2 billion selling land it bought in Texas for $2,000 an acre to a Chinese company for $11,000 an acre. They also made $1 billion selling the future production rights for the next fifteen years to 4,000 wells to Deutsche Bank and a Swiss investment firm. Of course, at 42 or more percent annual depletion, the wells should all be worthless long before the leases expire. Caveat emptor.

And there is a caveat for Chesapeake as well. Government leases require that drilling be undertaken within three to five years or the lease is forfeit. Fracking wells cost $10 million each, and the more of the early output there is, the worse the current gas glut and the lower the prices, which, at less than $3 a thousand cubic feet, are already far below costs, so that no one is making money just now on all the fracked gas being produced. Chesapeake was $3.5 billion in the red at the beginning of 2012.

Rolling Stone concludes: “If the bubble bursts, Chesapeake’s stockholders won’t be the only ones who pay the price – the shock waves will be felt throughout the economy, from homeowners who rely on natural gas for heat to manufacturers who were betting on it to power their new factories.”

This is apart from the millions of gallons of water diverted to fracked mines, then becoming a huge disposal problem when mixed with methane and toxic chemicals.

Wolf Richter, in the June 5, 2012, Business Insider, writes:

“The economics of fracking are horrid. All wells have decline rates where production drops over time. But instead of decades for traditional wells, decline rates in horizontal fracking are measured in weeks and months: production falls off a cliff from day one and continues for a year or so until it levels out at about 10% of initial production. To be in the black over its life under these circumstances, a well in the Barnett Shale would have to sell its production for about $8 per million Btu,pricing models have shown.

“At today’s price of $2.43 per million Btu at the Henry Hub—though up 28% from the April low – drilling is destroying capital at an astonishing rate, and drillers are left with a mountain of debt just when decline rates are starting to wreak their havoc. To keep the decline rates from mucking up income statements, companies had to drill more and more, with new wells making up for the declining production of old wells. Alas, the scheme hit a wall, namely reality.”

Of course, $8 per million btu is not an economically impossible figure, but it would leave scores of utilities and hundreds of factories with energy costs a magnitude greater than they expected when they did their conversions to natural gas. Meanwhile, drillers have been fleeing the supposedly cutting edge industry, pulling out their rigs by the hundreds and relocating them where fracked wells have some chance of hitting oil or at least natural gas liquids.

In an interview on oilprice.com published November 12, 2012, oil geologist Art Berman adds:

“Shale gas has lost hundreds of billions of dollars and investors will not keep on pumping money into something that doesn’t generate a return.

“The second thing that nobody thinks very much about is the decline rates shale reservoirs experience. Well, I’ve looked at this. The decline rates are incredibly high. In the Eagleford shale, which is supposed to be the mother of all shale oil plays, the annual decline rate is higher than 42%.

“They’re going to have to drill hundreds, almost 1000 wells in the Eagleford shale, every year, to keep production flat. Just for one play, we’re talking about $10 or $12 billion a year just to replace supply. I add all these things up and it starts to approach the amount of money needed to bail out the banking industry. Where is that money going to come from?”

A commonly quoted claim, based on reports by the authoritative Potential Gas Committee, is that the United States has natural gas resources from all sources, including shale gas, that will last 100 years. Even President Obama has repeated this figure. The November-December 2012 issue of Public Power reports Art Berman’s deconstruction of that number:

“‘A resource is everything that is in the ground without consideration of economic value,’ he said. ‘People look at shale gas resources and say they are immense. However, the next question is, of that total volume of resource, how much can you make money on? And the answer is a much smaller percentage.'”

Public Power summarizes:

“Berman’s math: If you divide the ‘technically recoverable resource’ of about 1,900 Tcf (trillion cubic feet) of gas, as identified by the Potential Gas Committee’s (PGC’s) report by annual U.S. consumption, you come up with 90 years. However, the PGC’s report also says the ‘probable recoverable resource’ is only about 550 Tcf – approximately one fourth of the ‘technically recoverable resource.’

“Furthermore, if you divide the 550 Tcf ‘probable recoverable resource’ by three, which represents the component of the resource that is actually provided by shale gas, you get about 180 Tcf. (The remaining 370 Tcf includes conventional reservoirs plus non-shale/non-coalbed-methane unconventional reservoirs.)

“The result: There is about eight years’ worth of shale gas supply available in the United States, he said.”

Conservation and Renewables

This section and the next, on climate change, are the subjects of other articles. All I am doing here is making a few basic points. The problem, as all but the most pessimistic peak oil theorists agree, is not that we will run out of oil soon, but that conventional crude oil is declining steadily while the replacements all require a much greater investment of money and energy to extract and the volumes that appear likely don’t match rising world demand. This is most pressing on liquid fuels for transportation, somewhat less so for electricity generation. What, then, would be a prudent course? We can reasonably expect that oil for transportation will become gradually more and more expensive, placing a growing burden on expenditures for other essential needs, such as maintaining infrastructure, health care, and Social Security.

Frankly, world population growth, coupled with rapidly rising standards of living in the developing world, pose an essentially insurmountable problem on a planet on which a wide panoply of resources from oil to potable water to arable land and fish in the sea are all in sharp decline. Human societies, especially the most advanced, which make the most profligate use of our depleting resources, will have to sharply reduce a variety of resource demands, most especially oil and using living animals for meat. That reduction would be less wrenching if it were begun early and managed sensibly at the government level. Given the gridlock in American politics, the institutionalized denial promoted by the Republican Party and the fossil fuel companies, and disbelief by the majority of the citizenry it is pretty certain that these issues will be faced only when they irrupt at crisis proportions, in runaway prices or massive shortages. There are things that can mitigate the downward slide, and while it will be hard to implement them when the need is already on us, here are some.

First, there should be greatly increased investment in electric transport; in light rail, and electric trolleys and buses, for urban and interurban transport, and development of long-distance electric freight rail. Republican politicians bitterly oppose this fairly obvious step, which requires only existing technology already in wide use.

More than 80% of transportation depends on oil in the form of gasoline and diesel. But according to the EIA, non-fossil-fuel sources produced 31.4 percent of U.S. electricity during the twelve months ending in October 2012. This is good news, but doesn’t solve all our problems. The lion’s share of that was from nuclear, at 19.2%. There are 104 nuclear power plants in the United States, construction on all of which began in 1974 or earlier. No new plant has been built in thirty-nine years. For opponents of nuclear power that is a good thing, but as other sources of electricity become scarce, people may well reconsider their nuclear options. Still, it takes a very long time to get approvals and then to complete construction of a nuclear plant.

And for those who blithely toss off the idea that we don’t have to worry about declining oil because there is always solar and wind power, they should consider that these sources provide only 5.3% of U.S. electricity. As for personal transport, through December 2012 a total of 75,000 highway capable plug-in electric vehicles had been sold in the United States. Things look only slightly better when we include hybrids: 2.4 million hybrids were sold in the U.S. between 1999 and the end of 2012. Of course, not all of those are still on the road, and there are 254 million registered passenger cars in the United States, making hybrids something less than 1%.

This brings us back to the IEA’s forecast, which now doesn’t look so optimistic: that in 2030 the U.S. would be importing only 30% of its oil, provided Americans reduced their per capita consumption by 40%. The Obama administration in August 2012 ordered auto manufacturers to reach average fleet fuel efficiency standards of 54.5 mpg by 2025.

Environmentalist Chris Martenson in a December 19, 2012, interview with oilprice.com stressed the need to radically improve electric battery storage. Buildings need to be constructed or retrofitted to require less heating and cooling. Martenson is convinced that existing technologies can be used to greatly reduce both oil and electric usage, but that this is unlikely in an economy that requires constant growth to maintain its equilibrium. Further, that private enterprise is simply not equipped to fund or carry through a major reorientation of the country’s energy usage. Only a major government effort of the kind that carried us through World War II can successfully confront such a grandiose undertaking.

Climate Change

Lastly, there was the worst bad news contained in the International Energy Agency’s World Energy Outlook 2012, which the press largely passed over in silence. Kurt Cobb commented:

“Of all the findings in the 2012 edition of the World Energy Outlook, the one that merits the greatest international attention is the one that received the least. Even if governments take vigorous steps to curb greenhouse gas emissions, the report concluded, the continuing increase in fossil fuel consumption will result in ‘a long-term average global temperature increase of 3.6 degrees C.’ [6.8 degrees Fahrenheit. Total warming to date since 1880 is .8 degree Celsius or 1.4 degrees Fahrenheit.]

“This should stop everyone in their tracks. Most scientists believe that an increase of 2 degrees Celsius is about all the planet can accommodate without unimaginably catastrophic consequences: sea-level increases that will wipe out many coastal cities, persistent droughts that will destroy farmland on which hundreds of millions of people depend for their survival, the collapse of vital ecosystems, and far more. An increase of 3.6 degrees C essentially suggests the end of human civilization as we know it.” (November 27, 2012 TomDispatch.com)

Taken together, America’s energy future is more threatening than rosy. The comparatively small increments from tight oil look even smaller as part of the world supply.