THE HIGH COST OF ENERGY INDEPENDENCE

8/21/2019

In the following you will find our translation of a column from RIA Novosti with commentary and notes [in brackets] by Vince Dhimos. In a previous column/translation, I had said that the belief that shale oil would make the US energy-independent and the world’s no. one oil producer is one of the mainstays of American ideological conservatism. I must add to this that ideological conservatism is radically different from plain vanilla conservatism, the best example of which is found in today’s Russia, whose president once said in an interview that he has no ideology at all, just solves problems as they come. And solving problems with common sense and reason is the essence of true conservatism – a dying way of life in the US, though ideological conservatism still calls itself conservatism, and therein lies the confusion afflicting Americans and the attendant failures in economics and foreign and domestic policy. Experience teaches that ideologies do not solve problems, they create them. But the lesson is lost on most Americans. Meanwhile, America is losing the shale oil effort even though it can claim the title of no. one oil producer! That is really quite extraordinary to say the least, especially since the US is losing the “oil race” to none other than the non-ideological conservative Russia, where no fracking is necessary in the oil production process and the product is profitable. You can bet your boots the pragmatic President Putin would never bet on shale oil in his country unless the non-shale oil in his country and the rest of the world were almost depleted. What the US ideologues forgot, of course, in their zeal to drive their round peg of shale production into the square hole of market economics, was the cost factor that makes shale oil unprofitable at this point in time. In the broader sense, it is this failure – or shall we say inability – to ponder the whole picture that causes the US elites to fail in all areas, ie, war, military arms acquisitions, foreign policy, diplomacy and general economics.

And you know the real crying shame of all this?

Some day in the not-too-distant future, oil in the Middle East, Russia and Venezuela could become scarce and the higher prices generated as a result could make US shale oil profitable. But with all the current haste to pump it all out at zero profit, it could be almost all gone by then! America could have been truly energy-independent at that future time, and could have been great again. But for politics and ideological conservatism in the early part of the century when the time was not yet right. A chance has been lost forever.

The Price of Independence: Bankruptcy Wave sweeps over US oil Sector

Aug 21, 2019

MOSCOW, Aug 21 - RIA Novosti, Natalya Dembinskaya. While the United States is breaking records for oil production - nearly 12 million barrels a day, an increasing number of producers are threatened by bankruptcy. We are talking primarily about shale drilling, to which the market owes such a rapid rise. Already, demand growth has seriously slowed down, and by 2020 a huge glut is expected in the oil market. The price the industry will pay for current record results is reported by RIA Novosti.

Extracting more and more

Global oil demand, increasing at about 1.2 percent per year, is not keeping pace with production. Unsurprisingly: black gold production in the United States increased almost 12% year over the (from 10.96 to 12.45 million barrels a day), and in 2020 another 7.5% is expected - up to 13.39 million.

Twenty years ago, oil demand grew about three times faster than today. But increasing fuel efficiency and the slow-down in China's economic development have changed the situation. [Need I interject here that Trump’s own trade wars are the biggest factor in the slowdown in China that threatens his pet oil dream. Neither Trump nor the rest of the US government seem capable of looking at the whole picture and foreseeing the long-term consequences of their policies] Trump’s current desire to escalate the trade war with the PRC, the largest energy consumer, points to even further slowing.

This is especially critical for small shale companies. Shale wells are rapidly depleted. The people in the business say it is necessary to conduct it as if on the run: constantly drilling new wells in order to maintain production and maintain profitability. Because of this race, the shale industry sorely lacks money both for aggressive growth and for dividends to shareholders. The matter is complicated by the fact that oil prices fluctuate around $60 per barrel, while in the past it was over $75.

As the International Energy Agency (IEA) warned in May, despite the record shale activity, a new market shock awaits them. According to IEA estimates, by the beginning of 2020, the world oil market will face an excess of supply, comparable to that observed in 2014-2015: production will exceed demand by almost two million barrels a day.

Critical level

OPEC efforts to contain production are not enough, IEA analysts say. That is, prices will continue to go down. This is bad news for shale projects, which are cost-effective, as a rule, at quotes of over $50 per barrel.

As John Hess, the head of one of the largest American shale companies Hess, said in March, with WTI oil prices around $57 per barrel, even a slight increase in the cost of borrowed funds would deprive many companies of their profits. To launch new projects, WTI quotes must be stable at around $60.

In 2010-2014, the development of technology and high oil prices led to an explosive increase in investment in oil production in shale fields. But in 2015, oil fell sharply and shale drillers had to fight for survival. In just one year, about a hundred manufacturers went bankrupt, owing a total of more than $70 billion.

According to the calculations of the American law firm Haynes and Boone, since 2015, 192 bankruptcies of oil producers with debts of more than 106 billion dollars and another 185 bankruptcies of oilfield services companies owed 65 billion have been registered. The reason is low energy prices amid a cyclical downturn in the economy, analysts said. [Not a good time for a trade war!]

Something similar is happening now. From April to June, the price of WTI fell by 23%. And the result was not long in coming: in May, Weatherford, one of the main providers of well drilling services, filed for bankruptcy. California Resources, an oil and natural gas exploration and production company, also had problems. Further, a number of small players, Bristow Group, PHI, Jones Energy and Rex Energy, also went bankrupt, burdened with debt.

However, what is happening on the market suggests that expensive oil from shale oil will not save the day. Despite waves of correction, since the beginning of the year, oil nevertheless added 20.7% in price. But the problems have not disappeared. In early August, a bankruptcy petition was filed by shale driller Halcon Resources. Concho Resources' profit fell 25 percent. Another shale producer, Whiting Petroleum, in an effort to deal with financial problems, announced a 30 percent layoff.

No investments

Investments could save the situation, but investors, it seems, have already turned their backs on shale projects.

"Investors from a number of producers with financial problems who suffered as a result of the price crisis of 2015 most likely lost hope that a rise in sale prices would be of help and improve the situation," Haynes and Boone said.

In ten years, the 40 largest industry representatives spent nearly 200 billion more than they earned. Thousands of wells in shale deposits pump much less oil and gas than investors promised. Last year, Wall Street invested half as much in the industry as in 2017. And the leading American investment bank Goldman Sachs warned that by 2025 shale will lose its economic significance: we are seeing "all the signs of depletion."

This is a constant problem. Production in shale deposits is rapidly declining, and the initial productivity is a thing of the past. Therefore, companies have to constantly drill new wells. And this is a huge additional cost.

Another reason for the decline in investment is environmental restrictions on drilling or on the switch to alternative fuels.

“Investors are worried that oil companies are spending money on things that are facing decline. And this is inevitable as electric cars and hybrid cars grow in popularity,” said David Katz, president of Matrix Asset Advisors, a New York-based investment company.

Over the past six years, the proportion of US oil and gas company shares in terms of value in the S&P 500 has declined from 8.7% to 4.6%. “Whenever they start drilling, billions go into the pipe. It's no wonder shale stocks are falling,” comments Steve Schlotterbeck, former CEO of EQT, the largest producer of natural gas.

In the context of a global glut, which is putting pressure on prices, shale is constantly losing money – it stays afloat only from the sale of assets and new borrowing.

For decades, the United States has dreamed of independence from foreign oil producers. This goal was achieved: oil companies are producing record volumes of crude oil and natural gas, and have taken the lead among exporters. However, as The New York Times notes, the price paid for it turns out to be too high.

2 Comments

John McClain

8/22/2019 06:01:39 am

One of the most critical issues has nothing to do with availability, but is a driving factor, superseding "rational economics", the U.S. has long controlled the world's flow of oil, to it's benefit, and we've used up all our leverage, power, and influence, and have nothing left but hype, and drive.
We led the world into "the oil age" and mere reason would suggest, absent deliberate conservation, we'd run out first, all things being equal.
As such, we also led the world in consumption, productivity, and were "most valuable customer" for decades, and only began our "comeuppance", in the early 70's, as OPEC was formed, to benefit from our endless demand, have a say in the pricing.
We, the Country, have been losing our game for decades, offshoring production, to balance out the cost of our inflation, but we've about run out, and having fed China our production for so long, now we seem to be angry that somehow, they learned about technology, by using it, to produce what we desired, and we want them to stop using our ideas.
With "offshoring" our major production, we no longer taught business management aggressively, but have allowed an "equal outcome" replace equality in birth, as our description of "fair", people don't start out in business as workers, and rise to become owners, with the experience of working up, our leadership in most corporate positions are those who were connected, not those who earned the seat, by productivity, so we don't have business leaders who know how to read "the book-keeper's books", and make rational choices for investment, opening, closing, essentially, establishing profitability or not, and making a reasoned choice.
With politics driving all policy, no thought is given to any long term impact, issue, difficulty, and as we arrive at them, most of us are at a complete loss to understand, not having considered the issues until they slapped us in the face.
I'm heavily invested in a corporation that began in 1903, and has led between 7 and 15% profit, dividends every year since, with the depression, and the recessions being high points, not low, for yield. They've maintained their management accessions by the same books they started with, and have never had a losing quarter. There are several such corporations in America, but they chose to remain in their expertise, make profit by providing value in service, and investing the profit in growth, improvement, maintaining themselves, not trying to leverage their profit, to take over another business, and profit by despoiling said business, costing jobs and invested planning, as major corporations have continuously been doing, ending competition, reducing choices in the market, but making huge gains for owners.
Between a "fascist government", and the fact crony corporatism far surpasses legitimate corporate activity here, we are essentially being cannibalized, by our elite, eating us away, until there is nothing left worth plundering, at which point, they will leave, and we will see D.C. full of blooming idiots, none of whom actually understand, our wealth is gone, our only choice is to begin at the beginning.
We, the U.S., began with the sound notion, "government is unable to run business" for a multitude of reasons, not the least is the corruption factor.
We also began with the same kind of people we currently have, some who would govern, or be governed, many who would rule, but never be ruled. Business always wins the battle for control, as long as real money is currency. The moment government controls currency, it is able to over-ride the fact business sense means profit, and the government can do everything wrong, and still profit, by manipulation of currency. At such a point, business can only regain control by stopping, turning away, entering a new form, avoiding government, but such needs the full support of "The People", or government simply replaces business leaders capriciously, to their own benefit.
That clown who goes out on stage setting up all those plates spinning on their sticks at the edge, knows he will lose the game, but win, because everyone loves to watch him scramble in the end, trying to save the impossible, the cost of admission, surpassing that of broken plates, but there is no corollary with government, they put the whole stock of plates on the sticks, simultaneously, never considering "a next show", or even the end of "this one".
Electric cars will not replace oil engine cars until a major breakthrough is made in electric cells. Current batteries are perhaps three times as efficient as they were a century ago, but at a cost of extreme pollution, and still, not even 3 or 4% the energy density of alcohol, much less gasoline or diesel.
"Fuel cells" have been around almost 150 years, yet have but doubled in efficiency, with no substantial change in fifty years. The Laser was invented in the mid sixties, using a most expensive ruby to make a rod,

8/22/2019 06:27:53 am

All battery cells operate the same way, chemically, acid or base eats metal from one pole, releasing electrons, providing power, and the pole plates are eaten away from corners, sharp edges, first, and pitting in the main only comes towards the end of their life.
When recharged, one reverses the process, pushing electricity into the battery cells, forcing the metal ion out of solution, back to its plate of affinity, but again, it attaches at the easiest point, edges, corners, sharp places, and after so many cycles of use and charging, opposing plates build up "mountains" between them, ultimately shorting out, if allowed to complete the cycle.
There is absolutely no way to ensure "atoms of metal come from specific places, evenly, and on recharging, returning to "their appointed place they left", this was accepted with zinc carbon batteries, never a thought to recharging, only recycling.
From the moment Man picked up a glowing stick, and made his own fire, Man has used the energy of the sun, imposed on plants for millions of years, to light his night, for a few hours.
We have completely altered our relationship with our earth, and each other, in 250 years of hydrocarbon fuel use, and at the present, only nuclear power is even capable of replacing hydrocarbon fuel for maintaining our way of life, all over the planet.
I've watched as the first semi-conductors came to be, allowing conversion of AC to DC, without electron tubes, in the fifties, commercially, through an hundred variations of multi-pole semiconductors, transistors with varying properties for operation, into integrated circuits, high density IC's, doubling their scaling every couple years on average, and it's by this factoring, we've gone from tube radios, to quantum radar.
We will not leave hydrocarbon fuels unless or until we run out, or our chemical generation of electricity also "doubles every two years", something that did take place after oil was first exploited.
We, the world, deliberately left solid based lasers, because the heat factor was simply not to be accommodated in solids unless "super-cooled", and run at near zero, Kelvin. Liquid based, fluid based lasers easily took over, and are "weaponized".
When we can design a battery that operates with flowing fluids, interacting, and reversible, by "re-charging", we might well see a battery capable of equalling the energy capacity of hydrocarbon fuels, until then, or the advent of nuclear power, sized to vehicles, we won't be "electric" in cars. We may well end cars, private ownership, and move entirely to mass transportation, electrically, but even power grid electric is some four times the cost of hydrocarbon fuel, or we'd have coast to coast electric trains, not diesel electric train engines, four or five, pulling hundred and some cars of load.
We don't make technology, we discover it, and find ways to use it to our advantage. Politicians presume we make it, and if we don't, it's because we choose not to, they won't believe the truth, it doesn't fit their plans.
Semper Fidelis,
John McClain
GySgt, USMC, ret
Vanceboro, NC, USA

ECONOMICS AND FINANCE

THE HIGH COST OF ENERGY INDEPENDENCE

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