It
Only Took A Global Depression To Reduce Gas Prices By 40 Cents
10
June, 2012
You
can’t watch the mainstream media propaganda channels for more than
ten minutes without a talking head breathlessly announcing that gas
prices have dropped for the 24th day in a row and are now back to
$3.55 a gallon.
Wall Street oil analysts, who are paid hundreds of
thousands of dollars per year to tell us why prices rose or fell
after the fact, are paraded on CNBC to proclaim the huge consumer
windfall from the drop in price.
This is just another episode of a
never ending reality show, designed to keep the average American
sedated so they’ll continue to spend money they don’t have buying
crap they don’t need. The brainless twits that pass for journalists
in the corporate mainstream media never give the viewer or reader any
historical context to judge the true impact of the price increase or
decrease.
The government agencies promoting the storyline of those in
power extrapolate the current trend and ignore the basic facts of
supply, demand, price and peak oil.
The EIA is now predicting further
drops in prices. Two months ago they predicted steadily rising prices
through the summer. What would we do without these government drones
guiding us?
As
you can see from the chart, gas prices tend to be volatile and
unpredictable in the short term. You can also see that since 1998 the
trend has been relentlessly higher. The average inflation adjusted
price of gasoline in 1998 was $1.41 per gallon, versus $3.55 today, a
152% increase in fourteen years. Over this same time frame the BLS
manipulated CPI was up only 44%. If we are swimming in oil, as the
MSM pundits claim, why the tremendous surge in price? It must be
those evil oil companies. It couldn’t possibly be the impact of
peak oil. To acknowledge the fact that worldwide oil production has
reached its peak would be to concede that our suburban sprawl, just
in time world is drawing to an excruciating end. So the politicians
spout their assigned storylines, supported by their paid off
“experts” (aka Daniel Yergin), and unquestioningly reported as
fact by their designated corporate media outlet. Those of a liberal
bent assail oil companies and speculators; refuse to acknowledge the
law of supply and demand, while touting green energy as the solution
to all our energy needs. Those of a conservative bent believe in
attacking foreign countries to secure “our” oil, refuse to
acknowledge the law of supply and demand, and spout “drill, drill,
drill” slogans because dealing with facts is inconvenient. The
willfully ignorant public believes whichever storyline matches their
preconceived beliefs. All is well – no one is required to think
critically. Thinking is hard.
There
are numerous factors that affect the price of oil on a daily basis,
but at the end of the day supply and demand determine price. The
chart below documents the key external events that have had a major
impact on oil prices since 1970. The vital fact that you won’t hear
on CNBC is that every recession since 1970 has been immediately
preceded by an oil price spike. Anyone living in the real world (this
excludes Cramer, Liesman, Bartiromo, & Kudlow) knows we have
entered part two of the Greater Depression. The surge in oil prices
in the last two years has precipitated this renewed downturn.
The
MSM blathering baboons of bullshit dutifully report the price of gas
on a given day. People who live in the real world fill up their gas
tanks every week, so the average price over a period of time is what
matters. The average price of a gallon of gasoline in 2008 was $3.39.
The average price in 2011 was $3.48. The average price in 2012 has
been $3.62 thus far. This data paints an entirely different picture
than the one painted by the politicians, experts and the clueless
captured media. Gas prices are higher than they were prior to the
last economic implosion. Cause and effect is a concept beyond the
intellectual capabilities of MSM journalists and the millions of
government educated zombies they mesmerize with misinformation. The
lack of intellectual curiosity and critical thinking skills plays
directly into the hands of those with a storyline to sell or truth to
obscure.
Swimming in Oil
The
recent storyline proliferated by the MSM at the behest of Washington
DC politicians and the corporate interests that control them, is that
the U.S. is on the verge of energy independence, with hundreds of
years of plentiful oil right under our feet. The chart below made the
rounds last week on Bloomberg, defender and mouthpiece of
billionaires everywhere. This chart surely proves that peak oil is
bullshit. Right?
Besides
the false representation of oil production and the misleading
conclusion that we have more oil than we need, the chart and
Bloomberg screed does not provide the true context of why worldwide
demand is tumbling. The chart is NOT showing
global crude oil production. It is showing global
oil and other liquids supply, which includes crude and condensate,
natural gas plant liquids, other liquids (mostly ethanol), and
processing gains (increase in volume from refining heavy oil). The
MSM would rather mislead the public than provide the true picture of
the supposed oil production boom. The question is whether the MSM is
misleading the public due to their own journalistic incompetence or
are they carrying out their assigned mission on behalf of the
corporate oligarchs running the kingdom.
The
chart below reveals a truer picture of the worldwide energy
situation. Conventional oil production hit its peak/plateau around 74
million barrels per day at the end of 2004, and has barely budged
from that level over the last eight years. Despite all the rhetoric
about the North American oil boom, conventional oil production is at
virtually the same level today as it was in 2004. The U.S.(shale oil)
and Canadian (tar sands) gains in production have been matched by the
collapse in Mexican production. The Middle East countries produced
23.3 million barrels in September 2004. The average price of a barrel
of oil in 2004 was $38. They are now only producing 23.9 million
barrels when prices are 120% higher.
Global
oil demand in 2004 was around 84 million barrels per day. To increase
liquid fuel supply to meet the 90 million barrels per day demand we
had to turn to unconventional fuels like tar sands, tight oil, and
biofuels, all of which have far higher production costs and far less
energy content than sweet crude. As the easy to access, cheap to
produce ($20 per barrel in Saudi Arabia), close to the surface sweet
crude has been depleted, it has been replaced by heavy crude, tar
sands, deep-water oil, and shale oil, with production costs in excess
of $80 per barrel. Anyone anticipating a long-term decline in fuel
prices must be smoking tar sands in their bong.
The liquids that have “replaced” conventional crude have a few slight drawbacks. Natural gas liquids provide about 70% as much energy per barrel as crude oil, so a barrel of NGL is not equivalent to a barrel of crude.
Have you filled up your SUV lately with some NGL? Ethanol provides only 60% as much energy per barrel as crude oil and its EROEI is pitifully low. The energy returned on energy invested for these non-conventional sources of energy approaches the minimum limits unless prices rise dramatically.
The Obama green army does not want this chart making its way into the public discourse. Their fantasyland of renewable energy solutions is proven to be a fool’s errand.
The liquids that have “replaced” conventional crude have a few slight drawbacks. Natural gas liquids provide about 70% as much energy per barrel as crude oil, so a barrel of NGL is not equivalent to a barrel of crude.
Have you filled up your SUV lately with some NGL? Ethanol provides only 60% as much energy per barrel as crude oil and its EROEI is pitifully low. The energy returned on energy invested for these non-conventional sources of energy approaches the minimum limits unless prices rise dramatically.
The Obama green army does not want this chart making its way into the public discourse. Their fantasyland of renewable energy solutions is proven to be a fool’s errand.
Catch-22 Energy Edition
The
price of a barrel of West Texas crude is currently $86 per barrel,
down from $109 per barrel in February. Obama supporters will proclaim
that his threat to crack down on speculators had the desired effect.
He must have scared those nasty speculators with his gravitas. The
price rise surely didn’t have anything to do with the U.S. led
attack on Libya, the act of war economic sanctions on Iran, the
beating of Israel/U.S. war drums, Japan demand due to the shutdown of
their nuclear power industry, or the relentlessly higher demand from
China and India. And now the MSM is trying to spin a yarn that prices
have dropped by 21% because worldwide supply is surging. That is so
much more palatable than telling the truth and admitting that we’ve
entered the 2nd phase of the Greater Depression.
It
took $140 a barrel in oil in 2008 to tip the world into recession.
Worldwide economies were much stronger then. The U.S. National Debt
has risen by $6.5 trillion, or 70% since 2008. Real GDP has risen by
$200 billion since 2008, or a 1.5% increase. Debt to GDP has risen
from 64% to 102%. Consumer debt at $2.55 trillion is exactly the same
as the 2008 level even after Wall Street banks have written off over
$1 trillion, subsidized by the American taxpayer. The consumer
deleveraging storyline is completely false. In 2008 there were 234
million working age Americans and 145 million of them were employed.
Today there are 243 million working age Americans and 142 million of
them are employed. In 2008 there were 28 million Americans in the
food stamp program.
Today there are 46 million Americans collecting
food stamps. The economic situation in Europe has deteriorated at a
far greater rate. Therefore, it is not surprising that it only took
$109 a barrel oil to push the world back into recession.
The
main reason prices are dropping is the collapse in demand from Europe
and the United States. The bumpy plateau of peak oil is in full
force. Prices rise to the point where they push economies into
recession, demand crashes due to the recession, and prices decline.
The double whammy of oil prices reaching $111 a barrel in 2011 and
$109 a barrel in 2012 have sapped the life out of the American
consumer. This is reflected in the plunge in gasoline and petroleum
usage since 2008, with a temporary leveling off in 2010, followed by
a further nosedive since 2011. As this recession deepens over the
next six months, prices will likely fall further. But this is where
the Catch-22 kicks in.
Once
prices drop below $80 a barrel it sets in motion a reduction in
capital investment, as new production projects are not economically
feasible below $80 per barrel. Oil analyst Chris Nedler explains the
Catch-22 aspect of oil prices in a recent article:
Research
by veteran petroleum economist Chris Skrebowski,
along with analysts Steven Kopits and Robert Hirsch, details the new
costs: $40 – $80 a barrel for a new barrel of production capacity
in some OPEC countries; $70 – $90 a barrel for the Canadian tar
sands and heavy oil from Venezuela’s Orinoco belt; and $70 – $80
a barrel for deep-water oil. Various sources suggest that a price of
at least $80 is needed to sustain U.S. tight oil production.
Those
are just the production costs, however. In order to pacify its
population during the Arab Spring and pay for significant new
infrastructure projects, Saudi Arabia has made enormous financial
commitments in the past several years. The kingdom really needs $90 –
$100 a barrel now to balance its budget. Other major exporters like
Venezuela and Russia have similar budget-driven incentives to keep
prices high.
Globally,
Skrebowski estimates that it costs $80 – $110 to bring a new barrel
of production capacity online. Research from IEA and others shows
that the more marginal liquids like Arctic oil, gas-to-liquids,
coal-to-liquids, and biofuels are toward the top end of that range.
My
own research suggests that $85 is really the comfortable global
minimum. That’s the price now needed to break even in the Canadian
tar sands, and it also seems to be roughly the level at which banks
and major exploration companies are willing to commit the billions of
dollars it takes to develop new projects.
Oil
prices may temporarily drop below $80, but prices below that level
for a prolonged period will lead to supply being constricted, which
will ultimately lead to higher prices. The storyline of hundreds of
years of Bakken shale oil that will make the U.S. energy independent
is the latest fiction to be peddled by the oligarchs as a way to
sedate and confuse the masses.
What the Frack
U.S.
oil production in 2007 averaged 8.5 million barrels per day. Today,
the U.S. is producing 10.7 million barrels per day. We must have hit
the jackpot. Not quite. Actual crude oil production has increased by
1 million barrels per day, a 20% increase. The other 1.2 million
barrels have been from liquefied natural gas (up 34%) and government
subsidized ethanol (up 100%).
The
U.S. crude oil production is at the same level it was in 1998, but
somehow we are on the verge of becoming energy independent. The
recent increase is solely due to the horizontal drilling and
hydraulic fracturing of shale deposits in Texas and North Dakota. You
don’t hear much about Alaskan production declining for the ninth
year in a row and California production declining to the lowest level
in three decades. The paid shills predicting Bakken production of 3
million barrels per day are purposely lying or just plain delusional.
North
Dakota oil production has reached 550,000 barrels per day versus
187,000 barrels per day in 2009. Simpletons in the MSM will just
extrapolate this growth to 3 million barrels by 2020. No need to
examine the facts. Oil market expert Tom Whipple reveals the
dirty secrets behind the Bakken shale oil miracle:
It
took the production from 6,617 wells to produce North Dakota’s
546,000 b/d in January. Divide the daily production by the number of
wells and you get an astoundingly low 82 b/d from each well. I say
“astounding” because a good new offshore well can do 50,000 b/d.
BP’s Macondo well which exploded in the Gulf a couple of years ago
was pumping out an estimated 53,000 b/d before it was capped.
Now
a North Dakota shale oil well is not in the cost class of a
deep-water offshore platform which can run into the billions, but
they do cost about three times as much as a classic onshore oil well
as they first must be drilled down 11,000 feet and then 10,000
horizontally through the oil bearing layer before the fracturing of
the rock can take place. The “fracking” involves at least 15
massive pumps that inject water and other chemicals into the well.
Take a Google Earth flight over northwestern North Dakota. The
fracked wells are hard to miss as there are now about 9,000 of them
and they are each the size of a football field.
There
is still more — fracked wells don’t keep producing very long.
Although a few newly fracked wells may start out producing in the
vicinity of 1,000 barrels a day, this rate usually falls by 65
percent the first year; 35 percent the second; and another 15 percent
the third. Within a few years most wells are producing in the
vicinity of 100 b/d or less which is why the state average for
January is only 82 b/d despite the addition of 1300 new wells in
2011.
The
rapid depletion of these wells, enormous expense to drill new wells,
oil prices barely above cost of production, low EROEI, swiftly
falling Alaskan and shallow water production, and the snail’s pace
of deep water production are not a recipe for energy independence.
Shale oil production will never exceed 1 million barrels per day. And
if you believe Saudi Arabia’s promises to fulfill any shortfalls,
I’ve got some delightful beachfront property in Afghanistan to sell
you. Saudi conventional crude oil production is at the same level it
was in 2005.
The
seven year Saudi plateau is just a precursor to what is going to
happen over the next decade. Saudi Arabia began pumping oil in 1945.
It will all be gone by 2045. You can’t extract an infinite amount
of oil from a finite world. Pretending this isn’t true won’t make
it so. Oil has been the lifeblood of our nation since the late 1800s.
The depletion of this essential ingredient of the modern world will
not lead to a sudden death for our way of life but a slow downward
spiral of waning supply, escalating prices, and economic decay.
The
sustained high and rising oil prices will be economically destructive
as our debt saturated, suburban sprawl, mall centric, SUV crazed,
cheap oil dependent society methodically and agonizingly implodes.
Chris Skrebowski describes our future succinctly:
“Unless
and until adaptive responses are large and fast enough to constrain
the upward trend of oil prices, the primary adaptive response will be
periodic economic crashes of a magnitude that depresses oil
consumption and oil prices.”
We’ve
entered one of these periodic economic crashes. They are coming
faster and faster. So enjoy that 40 cent drop in gas prices as you
drive down to sign up for food stamps. The Saudis have a saying that
acknowledges their luck in being born on top of billions of barrels
of oil and the inevitability of its depletion:
“My
father rode a camel, I drive a car, my son flies a jet plane, his son
will ride a camel.”
Delusional
Americans believe they have a right to cheap plentiful oil forever.
They refuse to acknowledge that luck has played the major part in
their rise to economic power. The American saying will be:
My
great grandfather rode a horse, my grandfather drove a Model T, my
father drove a Buick, I leased a Cadillac Escalade, my son died in
the Middle East fighting for my oil, his son will never be born.
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