Why Shale Oil Boosters Are Charlatans In Disguise

Asia Confidential's picture

Something has bothered me of late: why is the price of crude oil still elevated? Other commodities have taken a battering since 2011. Gold, copper and iron ore - all are way down off their peaks. But oil has seemingly defied gravity. And that's despite increased supply from shale oil in the U.S., still soft demand particularly in the developed world and declining rates of inflation growth across the globe.

What gives? Well, shale oil proponents will say falling oil prices are just a matter of time. And that the boom in shale oil will reduce U.S. reliance on foreign oil, leading to cheaper local oil, which will free up household budgets and spur consumption as well as the broader economy. Perhaps ... though I'd have thought all of that would be already reflected in prices.

On the other side, you have "peak oil" supporters who suggest high oil prices are perfectly natural when oil production has peaked, or at least the good stuff has disappeared. Yet the boom in U.S. shale oil appears to put at least a partial dent in this thesis.

There may be a better explanation, however. It comes from UK sell-side analyst, Tim Morgan, in an important new book called Life After Growth. In it, he suggests that the era of cheap energy is over. That the new unconventional forms of oil are far less efficient than old ones, meaning they require significant amounts of energy to produce. In effect, the energy production versus energy cost of extraction equation is rapidly deteriorating.

Morgan goes a step further though. He says cheap energy has been central to the extraordinary economic growth generated since the Industrial Revolution. And without that cheap energy, future growth will be permanently impaired.

It's a bold view that's solidified my own thinking that higher energy prices are here to stay. And the link between cheap energy and economic growth is fascinating and worth exploring further today. Particularly given the implications for the world's fastest-growing and most energy-intensive region, Asia.

Real vs money economy

First off, a thank you to Bob Moriarty of 321gold for tipping me off to Morgan's work in this well-written article. Morgan's book is worth getting but if you want the skinny version, you can find it here.

Morgan begins his book outlining four key challenges facing economies today:

  1. The biggest debt bubble in history
  2. A disastrous experiment with globalisation
  3. The massaging of data to the point where economic trends are obscured
  4. The approach of an energy-returns cliff edge

The first three points aren't telling us much new so we're going to focus on the final one.

Here, Morgan makes a key distinction between what he terms the money economy and the real economy. He suggests economists around the world have got it all wrong by focusing on money as the key driver of economies.

Instead, money is the language rather than the substance of the real economy. The real economy is a surplus energy equation, not a monetary one, and economic growth as well as the increase in population since 1750 has resulted from the harnessing of ever-greater quantities of energy.

In fact, society and economies began when agriculture created surplus energy. Before agriculture, in the hunter-gatherer era, there was an energy balance where the energy which people derived from food was largely equivalent to the energy that they expended in finding the food.

Agriculture changed that equation. It allowed for the creation of surplus energy. In essence, three people could be supported by the labor of two people, allowing one person to engage in non-subsistence activities. This person could make better agricultural tools, build bridges for better infrastructure and so on. In economic parlance, this person didn't have to concentrate on products for immediate consumption but rather the creation of capital goods. The surplus energy equation allowed for that.

The second key development was the invention of the heat engine by Scottish engineer James Watts in 1769, although a more efficient version was produced later in 1799. This invention allowed society to access vast energy resources contained in oil, natural gas, coal and so forth. In other words, the industrial revolution allowed the harnessing of more energy to apply vast leverage to the economy.

World fossil fuel consumption

In sum, the modern economy is the story of how society overcame the limitations of the energy equation. Or as Morgan puts it: "...all goods and services on which money can be spent are the products of energy inputs, either past, present or future."

The creation of surplus energy during the Industrial Revolution and subsequent explosion in economic and population growth isn't an accident. They're tied at the hip.

Energy and the population

Understanding the distinction between the money economy and the real economy can also help us better understand debt. Debt is a claim on future energy. The ability of indebted governments to meet their debt commitments will partially depend on whether the real (energy) economy is large enough to make this possible.

Era of cheap energy is over

Morgan goes on to say that the era of surplus energy, which has driven economic growth since 1750, is over. The key isn't to be found in the theories of "peak oil" proponents and the potential for absolute declines in oil reserves. Instead, it's to be found in the relationship between the energy extracted versus the energy consumed in the extraction process, also known as the Energy Return on Energy Invested (EROEI) equation.

The equation maths aren't difficult to understand. If the EROEI is 10:1, it means that 10 units are extracted for every 1 unit invested in the extraction process.

From 1750-1950, the EROEI of oil discoveries was very high. For instance, discoveries in the 1930s had 100:1 EROEIs. That ratio declined to 30:1 by the 1970s. Today, that ratio is at about 17:1 with few recent discoveries above 10:1.

Morgan's research suggests that going from EROEIs of 80:1 to 20:1 isn't disruptive. But once the ratio gets below 15:1, energy becomes a lot more expensive. He suggests the ratio will decline to 11:1 by 2020 and the cost of energy will increase by 50% as a consequence.

Energy returns vs cost to GDP

Non-conventional sources of oil will provide little respite. Shale oil and gas have EROEIs of 5:1 while tar sands and biofuels are even lower at 3:1. In other words, policymakers who pin their hopes on shale oil reducing energy prices are seriously deluded.

EROEI and energy sources

And further technological breakthroughs to better locate and extract oil are unlikely to help either. That's because technology uses energy rather than creates it. It won't change the energy equation.

While some unconventional sources offer hope, such as concentrated solar power, they won't be enough to offset surplus energy turning to a more balanced equation.

Oeuvre to growth tool

If the real economy is energy and the days of surplus energy are coming to an end, then so too is economic growth, according to Morgan. In his own words:

"...the economy, as we have known it for more than two centuries, will cease to be viable at some point within the next ten or so years unless, of course, some way is found to reverse the trend."

This terribly pessimistic conclusion requires some further explanation. Morgan explains the link between energy and the economy thus. If your EROEI sharply declines, it means more energy is needed for extraction purposes and less energy is available to the economy. Ultimately, this results in the cost of energy rising as a proportion of GDP, leaving less value for other things. Put another way, with the leverage from surplus energy diminished, there's less energy available for discretionary uses.


Now I don't have total buy-in to Morgan's thesis. It certainly solidifies my thinking that the era of cheap energy is indeed over. It provides a unique and compelling way to think about this. And the proof is seemingly all around us. It explains the high oil prices and the surge in agriculture prices (agriculture relies on energy inputs).

You can't help but being more bullish on energy and agriculture plays in the long-term. Oil drillers for one as they're more reliant on increased work than the price of oil. Also, the likes of fertiliser companies given agriculture land is tapped out, making an increase in output essential and thereby requiring greater quantities of fertiliser.

Morgan thinks inflation is on the way given a squeezed energy base with still escalating monetary bases. Regular readers will know that I am a deflationist over the next few years. But nothing is certain in this world and Morgan's arguments on this front have some credibility.

As for whether this spells the end of a glorious 250 year period of economic growth, well, I'm not so sure. The link between energy and economies is compelling. But whether we're at a tipping point where surplus energy disappears is a guess. I'm convinced that we're coming up against resource constraints that will inhibit economic growth. To say that we're imminently coming to the end of economic growth requires further evidence, in my humble opinion.

Impact on Asia

Asia has been the largest demand driver for energy over the past decade. The region's net oil imports total 17 million barrels of oil a day. China is now the largest net oil importer, having recently overtaken the U.S.. Other large net oil importers in Asia include India and Indonesia. Obviously, higher oil prices would be detrimental to these net importing countries.

It may be somewhat offset by agricultural prices staying higher for longer. China and India are agricultural powerhouses. And the impact of agriculture on their economies is still profound (agriculture accounts for 14% of Indian GDP and 10% of China).

On the other hand, higher agricultural prices mean higher food prices. And given lower incomes in Asia, the proportion of household budgets dedicated to purchasing food is much higher than the developed world. Therefore higher food prices has a larger impact on many Asian countries. Witness periodic recent protests on this issue in Indonesia, Thailand and India. So net-net, higher energy prices would still be a large negative for Asia.

Turning to resource constraints potentially inhibiting future economic growth: given Asia has the world's strongest GDP growth, it would be disproportionately hit if this scenario is right. The past decade may represent a peak in the region's economic output. Whether there's sharp drop or gradual fade is impossible to forecast.

These are but a few of the potential implications for Asia.

AC Speed Read

The real economy is a surplus energy equation, or the harnessing of ever-greater quantities of energy.

- That equation has deteriorated to such an extent that one can now declare the era of cheap energy over.

- If the economy is energy and cheap energy is gone, future economic growth will be inhibited.

- Consequently, higher energy and agricultural prices can be expected in the long-term.

- The impact on Asian growth may be disproportionately large.

This post was originally published at Asia Confidential:

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orangegeek's picture

Baltic Dry Index is tanking too - indicating shipping costs are very cheap - why?  Because demand for shipping isn't there to support higher prices.

orangegeek's picture

The era of cheap energy....whatever that means


At the start of January, WTI Oil sat at 98.70




The blow off market was in 2008 - 150 down to 30 bucks a barrel.  Highly doubt there will be a second blow off.  The rise in the USD should ensure this.

lawton2's picture

Oil shouldn't be over 75 dollars. The market is manipulated big time. Just make them take delivery with those futures and see how quick the price drops when the speculators and big oil don't control the prices so much.

Stud Duck's picture

James Howard !?????? Is that you under the name of Asia Confident???

Millivanilli's picture

Kuntsler is busy wringing his laundry by hand.  He is getting a start... on insanity.

Czar of Defenestration's picture

"While some unconventional sources offer hope, such as concentrated solar power, they won't be enough...".

Yeah..."hope" and CONCENTRATED COW FARTS will get ya farther, bub.

Solar.  REALLY?!  How the Leftists still have that Nazi "WILL TO POWER" thing down pat.

"If I just wish it so...or think it's righteous - in a non-religious sense, of course - enough, I'll FORCE everyone to use it!1!eleventy!!"


I Write Code's picture

Absurd article.  Nobody says oil price is going back to five bucks a barrel, for one thing secular inflation alone makes that 1970 price more like $50 anyway.  Yes shale costs more to produce than a prime, classic field, and nobody says otherwise.  Floor is probably about $80/barrel now.

Total energy prices are higher because we support green hobbies like solar and wind, which on a good day are break-even propositions, but mostly increase the aggregate price of energy consumed.  Canada tar sands are up around $80/barrel floor as well.  Nuke?  Well, its time will come again and maybe with the semi-mythical thorium, but it's not going to cost much less per joule.

So the only charlatan in town is the straw man you're knocking down with this screed.

NoWayJose's picture

Agree. You cannot bash shale oil because even if it will never be cheap, it does push the end of the oil economy out several more decades. Interesting that the author goes back to 1750 - as the great 'oil economy' did not really kick in until after WWII and the growth of suburbs and big highways. That era is ending, due as more to manipulated oil prices than to supply issues. We can expect people to concentrate more in towns and cities and be closer to life essentials. It will not happen overnight, but I expect to see $6.00 gas in a few years, and that will end the 45 minute commutes.

rtalcott's picture

While some unconventional sources offer hope, such as concentrated solar power,


Huh? You need to explain this nonsense.

Matt's picture

I believe the author, when talking about concentrated solar power, is referring to systems where a large array of mirrors focus solar rays onto a central collector, such as a water tower, to boil water and turn a turbine using steam.

This is contrasted with systems such as semiconductor based solar panels, which have a tremendous amount of imbedded energy in them, and may, over their life times, provide very low EROEI once their full life investment from mining through recycling are considered.

AustrianJim's picture

China needs to develop an oil industry - very difficult to do under Communism.

AustrianJim's picture

Yeah, I probably should have said, "efficient non-state owned" oil industry.

The Old Man's picture

Well charlatan's they may be but as long as OPEC holds tight to the price gouging, so they don't go belly up, oil and gas prices will stay "as is" in the range traded. And God forbid anything major happens in Putin's Sochi because his black squad may cull the royalty a tad.

Mi Naem's picture

"...his black squad may cull the royalty a tad."

Yeah, that is a nice thought, eh. 

Cpl Hicks's picture


Serfs Up's picture

Morgan's work is interesting, but in substantial ways it's a repeat of Martenson's Crash Course, in many cases eerily verbatim, but also a few years afterwards.

During his earlier career at Prebon, Morgan cited Martenson heavily in a report that followed the Crash Course carefully....not much attribution was given later on in the book though....always disappointing to see.

MrPalladium's picture

"the whole thing is a scam (monopoly rents)...everything stated in this article is simply a big pile of donkey doo."

Whenever I hear this argument that the escalating cost of finding and producing energy is "monopoly rents" I can't help but think of the political (and at the margin, ethnic) competition between the tollbooth economy (banks, brokerage, insurance, education, advertising, media, government) and the real economy (energy, manufacturing, agriculture, physical infrastructure).

If the energy industry has elevated returns then the answer is to compete by finding more energy rather than gathering savings and structuring financial accounts so as to maximize fees.

Why is it that the rents on financial assets, ecucation costs, government and access to medical payments are ever increasing despite advances in our computerized processing capabilities?

Matt's picture

"Why is it that the rents on financial assets, ecucation costs, government and access to medical payments are ever increasing despite advances in our computerized processing capabilities?"

1. inflation (money dilution, not just increase in CPI)

2. Unions plus

3. pension obligations, which need 8 percent returns in a ZIRP world

4. bigger banker bonuses

5. Demographic shift to more retirees and fewer workers

6. increased cost of energy inputs

How's that for a start?

DOT's picture

In other news: It's Cold!!

And there has been a major disruption of nat gas distribution. The temperature where I live is going to minus 30' F and Excel says,"turn down the heat" !




foxmuldar's picture

Does this explain why Natural Gas prices are skyrocketing? With all the fracking taking place here in the US, you would have expected Natural Gas prices for heating to have at least leveled off but instead their soaring higher. Could it be all those taxes that the local governments have placed on the Natural gas companies and those taxes are being passed on to us Natural gas users? Anytime Government sees a way to screw an industry, that industry eventually fights back by screwing its customers. 

Laughing Stock's picture

RE: Natty $

Lack of pipelines & most is being exported to Mexico, or flared

Move along


The Old Man's picture

Does HAARP have lobbyists too?

topshelfstuff's picture

China's People/Workers have enjoyed Wage Increase in the double digits annually for over a decade, plus, like last year, the wage increase was accompanied by a promise to increase it more, before the new year, should food prices call for it. This, along with a Purchasing Power with the renmimbi (something few Americans/West understand) needs to be factored-in, because we won't hear about this in our news. Explains having a Savings Rate near 50%

[the same, re: annual large wage increases, can be said for many other countries]

0b1knob's picture

"...all goods and services on which money can be spent are the products of energy inputs, either past, present or future."

Name just ONE good or service that is the product of FUTURE energy inputs?

Oh and a charlatan is by definition a fraud or faker.   So a charlatan in disguise is...?   What exactly?

The concentrated stupid of this article.  It burns.....

garypaul's picture

Great point 0b1knob. I've never understood statements such as "credit is a claim on the future". Is there a time machine that can pull objects from the future? I would say all credit/debt can do is pull from the present. You get credit by pulling actual money away from someone else temporarily. Whether the claim ever gets paid back is another story.

Matt's picture

When you borrow money, you are spending money before you earned it, in exchange for paying interest.

tickhound's picture


When u borrow money, you create new money, in exchange for labor at interest. Money is credit and can only be "earned" by way of an existing obligation or debt.

We do this in exchange for inflation or "growth" necessary to cover the outstanding interest that is never created.

The system is inherently inflationary. The system requires credit to grow. Forever.

Matt's picture

When anyone borrows at all, they are spending money before it is earned. This is pretty much universal.

Your description applies specifically to when a person borrows from a bank, in a system that uses fractional reserve banking.

When you say "money" I think you are talking about electronic US Dollars, rather than the concept of money as a whole.

0b1knob's picture

You can't spend your money before you earn it.    You can only spend somebody else's money.   You are all confusing money and finance with REAL goods.

There is NO WAY you can use "future energy" today (which is what the author states.)

The wheels are coming off the fiat currency financal dream world wagon.   No one wants to play their stupid game any more.   Loan money at zero interest rate?  How stupid do they think people are? 

mathdock's picture

0b, every commitment or promise is future-looking, whether it be a promise for a service, a relationship, etc; and its fulfillment requires  a promise maker to limit future freedom of action in the interest of the individual receiving that promise.  The phrase "good faith" is an acknowledgement of future-looking actions.  Matt is spot-on. The problem lies with economists pretending they are physicists and use the language of physcs to postulate a theory of money in terms that are time-independent.  You can lob your epithets now.

TimmyM's picture

IDK-how about electric service connections? Or maybe my train ticket? Or possibly the utility of this car I bought?

DOT's picture

Deficit Spending !

disabledvet's picture

the problem is that you have to pay for oil in dollars not that the "era of cheap oil is over." dollars are "expensive" (look at the cost over runs at the Gorgon gas giant)...ergo "cheap oil is too."

Shale oil is certainly not a panacea.

The tell however is the lack of imports (ports themselves?) from when to bring in the oil.

that's a price control mechanism...one that has been "blown away" by the shale oil boom.

same is true for natural gas I might add. "burn it up producing electricity" (they used to just flare it off btw).

to me all of this represents the creation of a false meme ("peak energy") when in fact when you do the math the exact opposite is true.

don't forget ethanol. I'm sure there's a number (fleet average of say 50mpg) that allows for the entire US vehicle consumer to run on flex fuel.

the whole thing is a scam (monopoly rents)...everything stated in this article is simply a big pile of donkey doo.

michael63636's picture

We may have hit peak oil, but we have not yet hit peak bullshit.

michael63636's picture

I think they are charlatans.  They are not in disguise.

garypaul's picture

don't forget ethanol? The author just pointed out the Return on energy input is 3:1 which is very poor. I will make a note to ignore your comments in the future.

BigDuke6's picture

Yep an embarassing first comment, Gorgon has overrun because australia has powerful unions and engineer shortages due to a mining boom.

And you pay a premium for drilling in a civilised place.

When you next do a first comment just say 'Me First!!'

El Vaquero's picture

3:1 for biofuels is being overly generous when you consider ethanol from corn.  The EROEI numbers that I have seen for corn ethanol are 0.7:1 to 1.4:1, and I would bet that it is closer to 0.7:1.  Land based plants, especially ones like corn, just are not good for this kind of thing due to the limitations in their metabolic pathways that relate to the efficiency in which they convert solar energy to chemical energy.  This limits the amount of chemical energy that can be harvested from a given land area.  Ethanol from corn requires further energy requirements, especially on the scale required for fueling fleets of vehicles. 


IMO, corn->ethanol for fuel is just a back door subsidy for corn growers to keep politicians in office.  Sugar cane is much better than corn at converting sunlight to chemical energy, and algae is supposedly even better than sugar cane.  Even if those turn out to be what we have to rely on in the future, growing corn to produce fuel is just plain fucking dumb.