Guest Post:Gregor Macdonald: What The End Of Cheap Oil Means

Tyler Durden's picture

Via Adam Taggart of Peak Prosperity,

On the heels of Chris' recent report clarifying the global net energy predicament, he and PeakProsperity.com contributing editor Gregor Macdonald sit down to talk in depth about the broken relationship between energy costs and economic growth.

For much of the twentieth century, the developed world saw a steady march upwards in wages and living standards, due primarily to huge quantities of cheap, high-yielding liquid hydrocarbon. As we find ourselves bumping along the plateau of Peak Oil's apex, suddenly we find that "growth" is a lot harder to come by.

Of course, if you follow the news today, this is not the story you are hearing. Talk of an energy bonanza and imminent energy independence (in the U.S.) are everywhere, thanks to gas fracking and tight oil production. What is missing from the headlines is the cost side of the equation and a blindness towards future demand. 

For certain, shale gas will be a boon for the U.S. and some other countries. But very little is transported these days by gas, and there are no mega-sized infrastructure projects underway to change that anytime soon. Extraction of new tight oil plays is increasing production, but not by enough to offset other field declines elsewhere in the world, and not at the prices we were used to over the past century. The era of cheap oil is over, and these higher permanent prices act as a boot on the throat of economic growth. Hence the mired global economy we have been experiencing in recent years.

Rather than fooling ourselves with fanciful "energy independence" pablum, we should be looking hard at what kind of future we want to have now that oil is no longer cheap. And we should be asking ourselves in regards to the remaining fossil fuels we're extracting: How can we put these non-renewable BTUs to their best use, before they become expensive, too?

I think the main conversation we are not having is that wages are very unlikely to ever return to a relationship to energy costs that would make the United States economy into a happy economic story once again. In other words, this whole idea that we will restore that unique relationship of high wages and low energy prices -- that is what we are not dealing with. So by telling ourselves the story that we are producing more energy, you can clearly see the cultural impulse there. The cultural impulse is there is to suggest "See? There is a chance, there is a chance we can get the energy cost down again and then there is a chance that that wages will come up again. That relationship got very skewed and kicked into a nasty bad place over the past decade. That is very much a way of thinking about what our economic story is, why we had the crisis, and why this supposed emergence from the crisis that we have been plodding our way through the past several years, why it feels so dis-satisfactory, why it feels so insufficient in many respects.

 

This goes back to the Industrial Revolution. What caused a revolution in British wages? The appearance of coal in the British economy. Why is that? Because not only did you have human workers making stuff, but also, now you had coal helping you make stuff. Coal was the slave labor that you did not have to feed or shelter or clothe or house. And you could get coal to work for you and you could work for you, and you put it all together and it becomes high wages, and you get to pocket those high wages.

 

So this is the dream that we once enjoyed, here in the States with our cheap oil and our high wages. And since oil became less cheap, the wages have stagnated, and I just do not see how we are ever going to get back to that relationship again. Maybe we will talk about this; I do have some hope that we could stabilize the relationship in a future world, which is more weighted towards the power grid in which some manufacturing returns to the United States. But I think the main thing is – you asked the question, what is the main thing we are avoiding? We are avoiding the very painful prospect  – likelihood – that we will not be able to return to high wages, low prices, cheap energy.

 

As you point out, one of the cruel things that we left in the wake of our higher rate of growth and our cheap energy era and our high wage era was the debt. We left a tremendous amount of debt. Of course there is the public debt, but I really think what has been governing the economy in the post-crisis era has been the intractable nature of the private debt. We have both done work on charting the course of the private debt and I am sure we would agree that there has been some deleveraging that has occurred, but it is not nearly the amount of deleveraging that the media either thinks or wishes has occurred.

 

When you compare private debt levels to assets in the United States, yes, we are off the peak, but we are only back to 2006 levels. Most of the people I know were worried about debt levels in 2006. So to “deleverage” back to 2006 levels is not an achievement.

 

This promise of greater energy supply is obviously dangling out the prospect that somehow that will translate into cheaper prices and that the debt can be serviced and possible extinguished or deleveraged. But as we are finding the process is grindingly slow, and that is a big reason why the economy is grindingly slow and just does not seem to make much progress.

 

These things can work for a short period in the short term, and that is what we have been doing in the last five to seven years. We have been adding either expensive or marginal sources to the liquid fuel supply, as you know. This process can be thought of as one where the older more cheap oil is continually swapped out for the more expensive, unconventional, more expensive oil, and that makes for some sort of new risks when it comes to how the global economy may slow or speed up and what it may do to oil prices.

 

Because what I think we are going to find, especially in resource plays like the tight oil resource plays: if price goes below what it is costing these companies to extract this oil, it is actually going to be quite easy for these companies to simply stop drilling; to just stop adding additional wells. Because if you look at the actual mechanics by which wells are currently being added, they are added on a highly discretionary basis. They go in, they produce a lot of oil for a short period of time, and then they go into steep decline.

 

I think what people do not understand is that the Bakken is not like a traditional oil field where you are developing the whole field at one time; you are really just sticking little pin pricks into the topography of the western Dakotas. It is not like a tar sands operation, in which you sink all of the steel in the ground first over a five- to six-year engineering project and then you try to get paid back for the steel that you sunk in the ground. This is more of an inch-by-inch incremental project in the Bakken.

 

So what it looks to me is if price goes below sufficient levels – and I currently put that if price goes below $80-$75 a barrel for any length of time – we will just lose supply much more quickly. I just do not think the market or the economy or Wall Street has gotten its head around the fact that a good chunk of our supply now is ready to go offline at the moment that price drops. And that is probably why price has been so sustainably high, because the global futures market for oil realizes that oil that you see now costs a lot more so it is not going to willing to sell you oil two years from now at $70 or $75 a barrel. It knows that the only way that $70 or $75 a barrel oil is available two years from now is if we are back into a deep recession. I mean a deep recession.

Click the play button below to listen to Chris' interview with Gregor Macdonald (48m:43s):

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francis_sawyer's picture

RAVENS bitchez!...

~~~

Sincerely, francis_sawyer

scrappy's picture

Ravens fan, check this out during any lame commmercials, or if you like, after the game.

http://v3solar.com/

V3Solar can concentrate the sunlight 30X, while keeping the temperature of the cells within 15 degrees F of ambient. By concentrating the sunlight, the Spin Cell produces over 20X more electricity than the same amount of PV on flat, static panels. Power Density provides a solution for a rural village, a solar farm, or your home. Clean, renewable power at the point of consumption.

I believe nature is telling us to distibute risk and regain balance.

 

 

 

AgAu_man's picture

Bli' me!  A solar Gattling Gun in reverse!  Clever mouse trap designers!

Have they also designed a lower cost/cell for the increased number of cells?  Or should we just print fiat?

 

AldousHuxley's picture

Chinese factory slaves would to worker cheaper to offset the increase in transport costs to US fat consumers.

problem solved.

GetZeeGold's picture

 

 

RAVENS bitchez!...

 

Turn into our next episode of Bread and Circuses tomorrow.....I think it's going to star Britney Spears.....but it's tentative.

 

otto skorzeny's picture

I hate being part of the matrix with the monopolistic NFL- but damn its exciting

Matt's picture

"What caused a revolution in British wages? The appearance of coal in the British economy."

I'm pretty suree this is incorrect. The Protestant Reformation (which helped bring about Individualism and Public Education) combined with the Dutch invasion of England helped lead to less corruption. That is to say, even the King had to obey the law and pay his debts, and not by simply stealing other people's property or increasing taxes (redundant). 

Less corruption, lower taxes, lower interest rates, the rule of law applied to everyone. These are the competitive advantages that provided higher wages and better living conditions.

Well, that, and they enslaved the Irish and took all their lands.

The high wages existed in England, which lead to the use of coal, not the other way around.

Bicycle Repairman's picture

Peak oil is a convenient lie.

Matt's picture

"Have they also designed a lower cost/cell for the increased number of cells?  Or should we just print fiat?"

So you watched the video with the sound off?

This design supposedly uses only 8 percent solar panels and 92% plastic lenses, so it has fewer cells, not more. it costs less and uses cheaper materials. The cells may be more expensive for their size, but the sunlight is focused onto the cells using the cheaper plastic lenses, as I understand it.

Would like to see them send a few to some quality review websites for testing by credible third parties.

If it costs less than $500 for a 1 Kw unit, and it gets good reviews, I might buy a couple.

Son of Loki's picture

I'm long Solyndra. Sorry.

GetZeeGold's picture

 

 

Hell of a ride......while it it lasted.

 

Make sure you get your donation in early.......it keeps the juice flowing.

thisandthat's picture

So, what's the Levelized Cost of Energy, again?

yogibear's picture

Goldman wants $150/barrel oil.

Richard Chesler's picture

Archive under crony posts.

 

AldousHuxley's picture

oil doesn't get expensive....dollar's value tanks....and worst hits US banksters because they can't buyout foreign assets with cheaper dollar.

Middle East bankers will get more powerful.

 

The Second Rule's picture

Dude. That's a Haiku//

 

 

oil doesn't get
expensive
dollar's value tanks

sessinpo's picture

AldousHuxley:    oil doesn't get expensive....dollar's value tanks

 

Unfortunately you have it backwards as you usually do. That is conventional thought. Here is why I say that, my reasoning on opposing your thought and not a personal attack on you.

 

Debts and payments, including oil for the majority of the world are dollar denominated, which means, logically, you must raise US Dollars to pay those debts and for barrels of oil. When we have a situation where the US dollar is not the currency reserve, I will then look to adjust my opinion, which might favor what you say.

By the way, it is the same situation with gold and many other markets (but not all). Because finances are generally US Dollar denominated, we see those markets go up with the dollar falling, and vice versa. That has been going on for years now. However, as an investor, when I see that a market that has benefited from such a scenario stops benefiting, then I am thinking the market is telling me that this particular market has exhausted its US dollar inverse relationship or some more dramatic supply demand relationship is in play.

 

I await your logical response to my post, without lowering the discussion into personal attacks that are off topic as I often face.

 

 

 

knowless's picture

so hold assets that are inverse dollar proportionate to pay for debts denominated in dollars?

nmewn's picture

Oh yes, the perfect time to implement a bureacratic/crony inspired carbon tax.

What could possibly go wrong?

N. B. Forrest's picture

I kind of wonder why Tyler keeps posting these guys again and again when they are always wrong. 

 

Peak Oil has been around since the '70s...  The 1870s that is. 

 

Someday they may prove to be correct, but so far they have been wildly off base. 

knukles's picture

The whole thing makes no fracking sense.

GetZeeGold's picture

 

 

It's the new global warming.......how many polar bears is this crap gonna kill?

 

Man the corporate jets and SUVs.......we've gotta put a stop to this.

Matt's picture

 

Most of us understand that exponential growth cannont continue forever in a finite world. However, Many of us would prefer if the exponential growth could continue a little longer, so we have time to restructure our economies, finance, and society towards sustainability, while having more energy per capita to provide higher standards of living.

There has been much talk about Thorium as the energy of the future, or even Nuclear Fusion. The immense amount of energy density is hard to ignore.

So looking along these lines, we have to also consider what can be sustained for a long amount of time. It turns out that the Earth acquires 100 tons per day of material from space, while losing about 10 tons of atmosphere (mostly Hydrogen) per day. That means we gain about 90 tons per day in mass.

What I am proposing is that, rather than wasting time and resources on developing limited sources of energy, we make a great leap forward to the infinite (or rather, what is practically unlimited for our purposes). I'm talking matter-antimatter annihilation.

Annihilating 1 kilogram of antimatter with 1 kilogram of matter produces nearly 9 Terawatt-hours of electricity. A BOE (barrel Oil Equivelent) at 5.8 million BUTs is worth about 1700 KwH. That means a 2 Kg annihilation is equivelent to about 5 million barrels of oil. If we were to annihilate the mass equivelent to the amount of material we recieve from space every day, we would produce energy equal to 225 billion barrels of oil per day.

If we start off annihilating 2 Kg per day, with a 1-percent efficient process, we can increase consumption and efficiency at the 7-percent per year rate we are accustomed to, for the next 200 years, by which time we should have reached a sustainable economy which can exist at that consumption level indefinitely.

Some of you may be concerned about safety. The idea here is not to store vast stockpiles of antimatter everywhere, but rather to convert matter into antimatter on-demand in the smallest unit neceesary for the application. Imagine being able to refuel your car by simply pouring a handful of pebbles off the ground into the fuel tank.

The research to develop this new energy source will have to be public, since no corporation is going to support a fuel source where everyone can just shove pebbles, sand or garbage into their cars, houses and factories rather than buying the energy from the corporation.

So how should we finance this program? The Carbon Tax seems to be the most equitable way to do so. Humans emit about 50 gigatons carbon-equivelent of greenhouse gases into the air each year. At a mere $100 per ton tax rate, this would provide us with a total of $5 trillion per year to finance various programs towards improving human quality of life, reaching sustainability, and of course, financing this project.

I humbly recommend that, as founding father of the new energy revolution, I be given a position on the board of directors of this project. I will accept this as a lifetime post, with a $5 million per year base salary, an equal expense annual account, and, as a diplomatic post, universal tax exemption for life.

Thank you for your time, please share this visionary idea to help bring about the next golden age of mankind.

 

Seer's picture

"If we were to annihilate the mass equivelent to the amount of material we recieve from space every day, we would produce energy equal to 225 billion barrels of oil per day."

Two questions:

1) How much energy does it take to initiate this process?

2) I'm assuming that inbound matter is widely dispersed, how do you go about rounding it up? (this is also has big implications for/in question #1)

Regarding my second question, this process is what essentially kills the notion of large-scale energy extraction from biomass.  While biomass may be quite a bit less dense than extra-terrestrial materials landing on the planet, it at least can be managed within a predictable/controllable area.

Anyway, it's always a good idea to try and account for all inputs before celebrating the outputs.

Matt's picture

#1: unknown. That's why we need $1 trillion per year funding going forward indefinitely to pursue research into this resource.

#2: since over 70% of the mass is stones, we can just use stones from anywhere. pebbles and dust are fungible in this instance.

 

Seer's picture

"Peak Oil has been around since the '70s...  The 1870s that is. "

It's Peak Production.  Worse, it's Peak Exports.

"Someday they may prove to be correct"

As long as we're relying on oil it's a certainty.

trav777's picture

HAHAHA

The USA peaked in 1970, idiot

Seer's picture

Trav, wasn't it 1971, the same year the US went off the gold standard?  I tend to use 1971 as THE key year in the downturn of the US.

Seer's picture

OK.  I'd read 1970 and 1971 somewhere (and felt I'd pick 1971 as it goes so nicely with the removal of the gold standard).

traderjoe's picture

1965 - the year silver no longer in coins.

Money Squid's picture

Year, 1970 - US Peak Oil production http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpus1&f=a

Year 1971 - US dumps gold stadard

Coinkidink?  Hmmmmmmm

Another -" oil and gold never flow in the same direction."

shovelhead's picture

Ah,

The famous bell-bottom curve.

OpenThePodBayDoorHAL's picture

Yeah, oil is abundant. That's why Brazil is going 500 km offshore, then through 5,000 feet of ocean, then through 10,000 feet of rock, just to go get some. It's everywhere!

dark pools of soros's picture

Mars probably had a bunch of oil but that is why we aren't there anymore....

 

maybe we can grab some shit off Titan that burns real well

 

 

sessinpo's picture

Yet in your own biased posting, you left out that the US (or North America) is finding much more reserves on land through better technology to retrieve that oil.

Now why is that?

otto skorzeny's picture

better tech? or more expensive tech to go into pristine, harder to access areas

ian807's picture

Yes, there are reserves in the continental USA in the same sense that there are reserves on the moons of Jupiter. All you have to do is ignore net energy return and price. Bakken wells, for example, deplete very quickly, as you would expect to happen in a low permeability reservoir. Then you have to drill again, and frak some more. It can be done, but don't expect either much energetic or economic profit from doing so.

Look guys. Oil company geologists aren't stupid. If frakking and drilling the continental USA was that easy and profitable, everyone would be doing it. Instead, we're still drilling though miles of water and rock in the Gulf of Mexico and looking at drilling the Arctic regions.

Sound a little desperate to you?

Oil in the continental USA and natural gas will push back the day when aggregate net energy isn't enough to run an industrial scale civilization, but not much. If the natural gas numbers aren't political fantasy, possibly for an additional 50 years, but no longer than that. At that point, we're reduced to deep sea clathrates, an insufficient number of nuclear power plants, a pittance of renewables and hope.

sessinpo's picture

Thumbs up for you Forrest.

 

I've noticed that ZH lately has gone into group think. Many posters here are becoming like MSM. As evidence, look at all your down arrows.

Yet some of the responses that agree with you have many up arrows.

 

Lots of non critical thinkers with lowers ZHs value. A shame. I would like to see these people that disagree with a post to state why. Present your argument. But most MSM followers can't and won't do that, because they don't think, they follow.

Flakmeister's picture

Practicing what you preach??

For example, a *critical* thinker would understand that dQ/dt is far more important than Q when discussing resources...

otto skorzeny's picture

as long as we can "access" oil at the end of a gun barrel oil will remain "abundant"-don't fool yourself.

Landrew's picture

You should do some homework. Peak Production of oil did occur in 1970's the work was not about the world it was about CONTINENTAL U.S. Alaska is not the continental U.S. nor is the Gulf of Mexico. Stop your lying!

The Second Rule's picture

You may want to watch a 3-part video called Peak Oil 101:

1) http://www.youtube.com/watch?v=d3nym1XpjhU
2
) http://www.youtube.com/watch?v=3Fb4zdxt42o
3
) http://www.youtube.com/watch?v=XQB3SvzOXY4

This is a geophysics professor Kenneth Verosub from UC Davis. I provided a slide overlay to his talk. Then youtube closed down my account and this deja guy reuploaded it, for which I'm grateful. Anyway it's a good video if I do say so myself.

the misanthrope's picture

Costs bitchez ! someone send a link to testosteronepit.

Whiner's picture

Straights of Hormuz, Bitchezzz! $200 a barrel. AU to $5000

AgAu_man's picture

If only.  You scream, I scream, we all scream for Eye-Scream: "$200 a barrel. AU to $5000"

squexx's picture

There is not, nor has there ever been peak oil. It is BS, there is plenty of oil, but certain members and lackies of the Satanic Tribe are controlling it. It was decided to use oil as the mechanism to control society long ago.

Ask anyone in the oil industry about those capped up wells in Lousiana, Alaska, etc...