Oil and gas prices…what is the market reality

Chris Martenson at Peak Prosperity emphasizes aspects of oil and gas markets often left out of discussions, something our own Spencer England has remarked upon as well in Oil industry is undergoing a major structural change

And I think that $80 a barrel production cost is on the low side from our new sources, being more to the $100 a barrel cost level. Past AB posts have followed the concerns of Americans early on, and address market issues where the price per barrel appears to be (Bill McBride) much lower and variable from the Middle East and Texas sweet, and also of the much more limited  quantities than promised in Tom Bozzo’s On Cornucopian Views of Oil Supplies ,  and claims of  (Spencer England ) significant jobs growth for the industry.

Conservation not technology will be our Saviour:

Chris Martenson: Well, this is really important. The current story is something along these lines: “Hey, look at how clever we’ve been. Because of the magic of technology, we have discovered how to unlock these incredible oil and gas resources that we just didn’t even know about before.”
When I talk to people who are in the oil business, they say, “Oh, no, no, we’ve known about those shale deposits, we’ve been drilling into and through them for decades. We’ve had horizontal drilling for decades; we’ve had fracking for decades. What we haven’t had is $80-a-barrel oil reliably enough to support us going into those with those technologies.”

So what really unlocked those reserves was price. Not technology, not cleverness, not ingenuity. Don’t get me wrong, there’s a lot of very clever, ingenious stuff going on in those drilling actions, but price was the primary driver here.

Here’s the thing, though: When more expensive energy comes out of the ground, it means that everything that you use to go get that energy, after a lag, becomes more expensive too. This is doubly compounded by this idea that there’s less net energy coming from these finds.

They use more energy to get that energy, but that more energy is more expensive. So that feedback loop is already in play here. It simply means that there’s less to be used as we like elsewhere in the economy.
When I look at America’s apparent energy abundance

I’m a little worried that it’s been oversold. In particular, the dynamics of depletion that exist in both the tight shale oil and shale gas plays are very different from conventional reservoir depletion dynamics. I’m concerned that people are accustomed to the old and relatively slow reservoir depletion dynamics and are lulled by the sharp increases in output that these new reservoirs offer without really understanding just how rapidly they fall off as well.
Here’s an example, in the Barnett shale gas play, in one region where they drilled 9,000 wells, there was just this exponential increase in gas output. But then there was no more room for any more wells in that section, and within one single year the gas output from that region with all of those beautiful, technologically marvelous 9,000wells had fallen by 44%. One year!
So as long as America can continue to forever increase the number of wells that it’s completing and bringing online every year, it will be able to maintain rising production from the shale plays. Obviously that’s an impossibility. You run out of space eventually, you don’t have enough rigs or talent to drill incrementally more wells each year, or the capital just isn’t there for some reason. Sooner or later, there are only so many wells you can complete. At that point, we discover that the rapid increases in oil production almost immediately begin to drop. And this is a whole new dynamic. I think we need to build in a little caution for ourselves around this story that seems to be almost completely missing from most mainstream news reports.
So really, we’re on a very elaborate treadmill right now, where as long as we can continue to drill, drill, drill, drill, drill, drill, drill, then we’ll get an increasing output. I’m not convinced that that’s going to happen.
There are a number of factors that will cause that to slow. One is environmental concern. Another is, I don’t think they’re going to have the capital to do that forever. A third is that we’ve already drilled through all of the known sweet spots in these plays, and so we’re down to the more marginal portions of the main plays. The wells going into the less-than-sweet spots are going to require higher energy prices to break even than did the initial wells. And fundamentally, sooner or later, you just run out of places to put new wells.
The biggest problem I have with how the shale story is being sold is it is being used to justify a blind resumption of business-as-usual and I think we really need to be asking some deeper questions of ourselves because eventually even these plays will run out too. I say we should have a distinct and well thought out plan for how we want to use the potential work those resources represent to build ourselves the finest country energy can supply.

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