Guest Post: The Shale Oil Boom is More "Mirage" than "Miracle"

Tyler Durden's picture

Submitted by Adam Taggart of Peak Prosperity,

Gail Tverberg, is a professional actuary who applies classic risk assessment procedures to global resources: studying issues such as oil & natural gas depletion, water shortages, climate change, etc. She is widely known in the Peak Cheap Oil space for her reports issued across energy websites over the years under the penname "GailTheActuary".

In this week's podcast, Chris asks Gail to assess the merits of the shale oil "revolution". Does it usher in a new Golden Age of American oil independence?

With her actuarial eyeshade firmly in place, Gail quickly begins discounting the underlying economics behind the shale model:

We have to ask: At what price is the oil available? Is this shale oil available because prices are high and in fact, because interest rates are low, as well? Or is it available if it were cheap oil with interest rates at more normal levels?


I think what we have is a very peculiar situation where it is available ,but it is available only because of this peculiar financial situation we are in right now with very high oil prices and very low interest rates.




The shale oil plays are going to be probably much less than a 10-year flash in the pan. They are very dependent on a lot of different things, including low interest rates and the ability to keep borrowing - which could turn around very quickly. Lower oil prices would tend to do the same thing. But even if you hypothesize that we can keep the low interest rates and that the oil price will stay up there, under the best of circumstances, the Barnett data says they probably will not go for very long.


You know, when you take how long the payout really is on those wells, I think the companies drilling these plays have been very optimistic as to how long those wells are going to be economic. There was a recent study done saying just that: 10 years or 5 years; but certainly not 40 years.


And so these companies put together optimistic financial statements that have the benefit of these extremely low interest rates. They keep adding debt onto debt onto debt. How long can they continue to get more debt to finance this whole operation? It's not a model that anybody who is very sensible would follow.

Similar to many energy experts Chris has interviewed prior, Gail looks at the math and concludes that humans (especially those in the West) have been living on an energy subsidy that is beginning to run out. We have been living outside of our natural budget, and will be forced to live within what remains going forward. As a result, she expect great changes in store for the next several decades: socially, politically and lifestyle-wise.

Click the play button below to listen to Chris's interview with Gail Tverberg (38m:07s):



A further excerpt:


Chris Martenson: Okay. So which comes first, then – low oil prices or low oil supplies leading to higher prices? Which do you see is driving the future here?

Gail Tverberg: I see government problems that are being brought on by oil as being the next step. And the government problems will bring the oil prices down. So as oil prices come down, then that brings the supply down. But it is the government problems that are the intervening step in there. It is the fact that the governments are put in a position where they need to support all of these people who cannot find work, and this is related to the high price of oil. And also, it is supporting promises that we have made over the years.

There is also the debt part of it. We depend on very low interest rates to keep the cost of that debt low right now. But the debt has been escalating since 2008, the federal debt has. And so the government is in a very tight situation, and it is the government problems that have the potential to spill over into the rest of the world situation. And it is through that mechanism that we will see the decline in oil supply. That is the way I see it going.

Chris Martenson: All right, so make sure I have got this: Because the government has taken on a whole lot of debt, it is trying to support a lot of people who are out of work; the economy is basically moribund because of high oil prices, so there is a little self-feedback loop in there. But ultimately, it is going to be the fiscal condition of the government – let’s say the U.S. government?

Gail Tverberg: It is going to be the fiscal condition of the U.S. government, and it is going to be all of the debt outstanding. It is going to be the fact that we cannot keep those interest rates low permanently. We cannot keep this quantitative easing up. And what is going to happen is the interest rates will rise, and that will cause a big problem. Or at least that is one scenario. There are so many different scenarios that could cause a problem. That is just one of them, anyhow.

Chris Martenson: You are talking about all of this leading to a deflationary outcome at some point. The Federal Reserve obviously is working double-overtime to prevent that outcome exactly. A lot of people have staked complete faith that the Fed has this all in hand and will lead to an inflationary outcome, I believe. World bond market prices, equity pricings, resurgence in real estate values, things like that are all collectively telling me that the bet has been made. The Fed will not lose this battle. Do you think they might?

Gail Tverberg: What happens is all of the extra money from the quantitative easing is going into speculation. And it is pumping up the prices of the stock market, the bond market, housing prices, farm prices, you name it. And so it is off in these places where it is not Main Street, it is not doing things that are getting people jobs. And so we have this temporary bubble on assets that cannot stay there if interest rates go up.

Chris Martenson: That is the big “if” in this story. Well, for me, it is a “when” – when interest rates go back up. We have hundreds of years of history on interest rates. And right now, I believe the U.K. or English gilts are at a 400-year low in terms of interest rates. So you might say there is a small chance of reversion to the mean in that story.

Good chance that might happen, and yet, we have this collective bet on such an outcome not happening. People are really hoping for something other. This is, I think, the heart of what you write about a lot – this idea that capital formation is a very different process from printing money. And I have seen otherwise very well-credentialed economists mixing those two things up, using the words interchangeably, that the Fed is basically creating capital. In my mind, capital is something that happens after you have performed some useful economic activity and there is a surplus left over. And then, that capital can be saved and that savings can go back into investment. That loop seems to be pretty well broken, as far as I can tell.

When we look at capital expenditures by corporations, we look at infrastructure spent by the Federal government. Very much a decade of lows. So we are not plowing any of this money back in. It is being used instead for speculation.

But the common story right now says that hey, high asset prices are a cure; they work. High housing prices, prices going up, that creates a wealth effect.

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Flakmeister's picture

Oh goodie....

There is also this out recently on the Monteray...

Not all it is fracked up to be...

Colonel Klink's picture

Oils well that ends well.  But it doesn't sound like it's going to.

Occident Mortal's picture

I agree that rates in the West are going to tick up soon.

But oil consumption has changed, China now imports more oil than the US and China is expected to be consuming more oil than the US in about 3-4 years time.

So global oil demand isn't as US sensitive as it once was.

The thing is USA used to be 26% of global GDP. Today USA is just 17% of world GDP and falling.

0b1knob's picture

Don't we get a slight variation of this "peak oil" nonsense every day on Zero Hedge?

NoDebt's picture

Peak oil or not, there is no way to support a county the size of China turning into another US in terms of meeting oil needs.  Not at current prices, and certainly not back at the prices of only a decade or so ago.

Peak oil?  No idea if that's true or not.

Peak demand for oil?  Maybe in the US but not worldwide with China coming on-line.

Money Squid's picture

the peak concept has been demonstrated for each well, each lease, each field, each country. Oil companies go for the easiest, least expensive, highest quality oil first. Produce at the max, no thought about tomorrow. There is a stock price to improve, dividends to pay, bonuses to pay. Wells are constantly worked over, redrilled, re-completed, re-stimulated to keep trying to increase the oil cut. Look at any production graph for a well - that is reality right there. Look at the production graphs for individual wells and cumulative production for wells (look at the number of wells drilled per year and the total number of wells now and how there are clustered) and think if that production level can be sustained. If not, it peaked. simple. Oil cos are not charities. As soon the prices drops too low for a well, lease, field, the well are shut in.

Money Squid's picture

I am curious if the single down voter has any oil field experience, or just quick with the voting.

mumbo_jumbo's picture

and there's the rub, China is nothing like nor will it ever be like the USA......taking the current trend and extending it forever into the future is a fools game.

personally i think the sun is setting on the china story.

Money Squid's picture

the peak oil conept is nonsense to anyone who can not grasp the concept.

On a side note - EIA contracts out to put out much higher tight oil reserves than USGS. The maps showing the location/extent of the resources changes constantly, but are mostly very positive in appearance. When the price of oil was peaking there not only demand reduction but some demand destruction. The paper oil market was developed to control the price and the price can be pushed up or down depending on what is needed to throttle the western economies and keep the majors pumping enought to keep things going, but to also hide the peak production number. Low financing is key to keep the drilling going for nat gas even when nat gas prices are too low to support the additional drillig.

ZH had a few articles on cheesy peak engergy and their financial matters.

El Tuco's picture

Someone once said here that if oil is so abundant why are we pressure washing sand to get it or drilling shale rock to extract it.

I am sure there is plenty of oil around but when you have to burn 2 barrels to get 2 does it make sense anymore?

Money Squid's picture

you got that right Tuco. It is not just "is there any oil left" but what is the cost to get the remaining oil out.

Oil used to shoot out of the ground. Now lots of technologies are employed, and new ones being developed, to try to produce what is left after all the easily produced oil is gone.

daveO's picture

There's still incredible amounts left, they're just deeper. If interest rates were normal, that's where Big Oil would be concentrating. Since rates are too low, manpower is being diverted to shallow 'easy pickings', that aren't economic in the long run. Thanks Bernanke, you're setting us up for shortages. 

Money Squid's picture

The easy pickens are long gone friend, long gone. Standard Oil was working over Indonesia in the 1890s. If there was so much easy pickin oil why would Standard travel all the way over there before 1900?

If I recall correctly the well that was just completed by the offshore drilling platform, Deepwater Horizon, was about 30,000 feet below the surface of the ocean when it blew out. To extract that oil the price per barrel must be high enough to offset the exploration, drilling and operation costs, in addition to the pool being large enough to supply the needed volume to make it all worth the inestment. Interesting how some people think there is so much oil left, but it takes $500,000,000 drilling platform operating in 5,000 feet of water to drill a $100,000,000 well (and that was the second well, BP f'd up the first one too).

The discoveries off Venuzuella is very thick heavy stuff.

The huge reserves predicted in the Caspian did not pan out.

Better keep looking.

cynicalskeptic's picture

'when you have to burn 2 barrels to get 2 does it make sense anymore?'


or when you consume 90% of the locally available water at a rate that's 100 times higher than other uses and pollute what's left is it worth it?

Fracking, tar sands oil and water injection all are major users of water - and cause serious pollution where used (despite claims to the contrary).

Ident 7777 economy's picture

A little basic chemistry chum: what are the basic products of combustion? 

TrumpXVI's picture

Yes that, AND WHY are we cutting it with ETHANOL????

That, to me is a dead givaway that something is seriously wrong with availablity of high quality supply.  No one cuts high quality naptha with ethanol unless they are getting desperate.  It's nothing new.  The Germans and the Japanese were both forced into that situation during WWII....because they couldn't get their hands on enough crude oil.

Ident 7777 economy's picture

Two words: "Farm Lobby".


Geez, just 'follow the money'. 

Flakmeister's picture

There is more to it than that....

But the Farm lobby is clearly supportive of the ethanol policies that led to the current mess...

Kirk2NCC1701's picture

"Oils well that ends well" you say?
Oh frack! Here come the frack ho's, looking to SNAP up deals.

Obese-Redneck's picture

Remember when Ronnie was king and we pissed away the entire North Slope and North Sea oil on jet skis, 300 hp bass boats and Hummers?
What do you think will happen when the "cheap" shale runs out? You think 2.99 is bad! ha! Enjoy your Camaro.

prains's picture what you're say ins this is just another little short run ponzi scheme

Gringo Viejo's picture

More Mirage than Miracle?
You can say that about most everything in today's America.

mess nonster's picture

Peak Cheap Oil is right. Here is a little perspective. The Otto steel overshot waterwheel on modern bronze/graphite bearings was the world's most efficient machine. In the 1920's an otto waterwheel was estimated to operate at 95% efficiency. of course, as the energy left the prime mover, effciencies drop with gearing, etc, but what other prime mover can boast of such efficiencies? The most efficient heat engine is a steam turbine, and it never does better than 30%.

When one couples the incredible efficiency of a waterwheel with the fact that its power souce was essentially free, one has to wonder why water powered mils went out of business with the advent of cheap petroleum and electrical power, which operate at end use efficiencies less than 15%,and sometimes, especially with electricity, at negative efficiencies, taking into account all embodied energy inputs.

Some part of this can be explained by faster production rates for motors using fuel or electricity, but did the upswing in production make the difference? If an energy source can cpompete with free, then it has to be effectively cheaper than free. i say that the massive thermal inefficiencies more than compensate for increased productive capacity. I make the contention that until now, fossil fuel and especially petroleum has effectively been cheaper than free, and that is the only reason it has become the dominant fuel source..

Now that fossil fuel actually has a cost, it is no longer competitive. F**k bitcoin, I'm building waterwheels.

daveO's picture

The Rockefellers(from Standard Oil) had a lot to do with it. The EPA is there to keep their competion away. They depend on gov. regulations for their market share. Mining coal is much cheaper than driling for oil. That's why BHO's determined to stop it!

A personal experince taught me this when I was a kid. There were plans to dam a river near here for hydro power. Well, before you know it, people were fighting it. Then, an organization popped up to fight it. The money for this org. came from out of state. I wouldn't be surprised if the Rockefeller Foundation chipped in a few bucks, or the coal miners, who were big back then. They convinced the Feds to stop it, in the name of the environment, after millions had already been invested. Since then, they've managed to shut down mines for the same reason (lie). Now, they're talking the same trash about fracking. Gee, I couldn't see that one coming! /sarc. 

Flakmeister's picture

My what an active imagination you have....

Ident 7777 economy's picture



daveO - picking your fave bogey man again?


Take a look at what they DID for the common man and KEPT prices low!


'course, this does not match well with your built-in OWS mindset ..


starfcker's picture

don't think this bitch doesn't have an agenda, bought and paid for. i have listened to all the same arguements about water scarcity here in florida. how you going to make something expensive if you can't make it scarce. there is a LOT of shale. the middle  east has enormous proven reserves that they haven't bothered to tap yet, and vast areas unexplored by geologists. is it finite? of course. but not in our lifetimes.

greatbeard's picture

>> the same arguements about water scarcity here in florida.

When will you believe it is becoming scarce?  I live in an area that's fortunate to be flush with springs and water.  But springs that were putting out 10M gallons a day 30 years ago are now putting out 1M gallons a day.  This is a direct result of pumping and consumption.  Do the wells have to run dry for you to believe water is a scarce resource in Florida?

CuriousPasserby's picture

I have one word for you, desalination. 2/3 of the Earth's surface is water.

daveO's picture

My grandparents used rain barrels. FLA ain't exactly a desert.

Kirk2NCC1701's picture

Northerners are not designed to live in FL, w/o massive amounts of cheap water, energy and AC.

The 20 yr outlook for FL is not exactly "compelling". But, even so, as long as "there's a sucker born every minute", there'll always be plenty of realtors, shills, and snake oils salesmen happy to sell you "great property" in FL.

We were happy when we arrived, and even happier still when we left. FL? Never again! Not even on vacation. Sorry.

Kirk2NCC1701's picture

And the Dirty Little Secret about water consumption, whether in FL or anywhere else, is that Residential usage is a tiny fraction of overall usage.

The usage for Industrial and Agricultural demand dwarf Residential usage. They also pay far, FAR less per gallon than Residential users. What a total SCAM water usage and prices are.

Errol's picture

Greatbeard, I live in Greater Miami and fish a canal about 8 miles from the ocean.  It is now brackish.  There is no longer a strong enough hydraulic pressure from onshore freshwater in the aquifer to keep the more dense seawater offshore where it belongs.  It will be a horse race whether Miami first dies of thirst or is inundated by sea level rise.  I no longer own real estate in Miami.

Regarding the Middle East nations' phoney-baloney "reserves" numbers, here is all you need to know: the OPEC export quota for each nation is based on its "reserves" number.  No temptation for exageration there, huh?  Saudia Arabia's official policy on reserves audit: "Nothing to see here - move on buddy".

starfcker's picture

yeah and the reason that water is brackish is that they dump the water out of lake okeechobee into the ocean sideways throuth the st. lucie canal and the caloosahatchee river that discharges into the gulf. they can fuck urban miami and u.s. agriculture in homestead at the same time. water management always has a reason why they have to dump water. it's all run to create scarcity. they do the same thing to atlanta. always a great reason to dump atlanta's water out of lake lanier into the gulf. wake up. there are places water is finite. south florida isn't one of them

daveO's picture

Of Course!

Judging by the number of down votes, there must be a lot of Arab Sheikhs reading this page.

mess nonster's picture

The saddest blog death on record. Everyone should read The Oil Drum archives and educate themselves. Energy is economy.

Ident 7777 economy's picture




Boo Hoo.


If 'they' a) had a market for their spiel and b) any credibility they would be doing land-office business.


They're not, and the 'market' saw that ...


End of story and TOD.


Flakmeister's picture

They refused to accept advertising and most of their authors bootstraped themselves to better things... 

Eeyores Enigma's picture

Total R E S P E C T Flakmeister!

I find it interesting that no one even questions WHY are we relying on fracking for new oil production anymore as if it were an obvious advancement in oil production. New tech and all.

It's not! More like 50 year old tech.

It's a major step backwards. It's scraping the bottom of the barrel. It's an act of desperation.

Radical Marijuana's picture

"scraping the bottom of the barrel" gets uglier and uglier.

Similarly in Canada:

Environment minister says negative environmental effect of more oil sands development is 'justified in the circumstances'

Fracking, like oil sands, etc., use HUGE amounts of water, and leave those water supplies, and everything else that depended upon them, in very degraded and toxic conditions for a long, long time. There is nothing to stop that, since the most dishonest and violent people prevail in getting what they want in the short-term, while the longer term consequences get delibertately ignored.

Human beings act like robbers in their environment. Technological progress ends up being used to maximum the short-term interests of the best organized gangs of robbers, who get what they want through applying the methods of organized crime to control civilization. Hence, collectively, we behave in runaway, criminally insane ways, and so, we more and more are scraping the bottom of the barrel, in ways that are getting uglier and uglier, while those doing that are asserting that is 'justified in the circumstances' ...

The true long-term costs of energy developments are usually discounted down to nothing. It is always privatizing the profits, while socializing the losses. However, eventually almost everyone shares in the much greater, longer lasting, losses, BUT, the short-term privatized profits are able to dominate the political processes, so that we collectively agree to prepare to commit suicide, while a few benefit in the short-term, from preparing that well-paved road to hell.

DaveyJones's picture

"Human beings act like robbers in their environment"

Stanislavsky method

Radical Marijuana's picture

Indeed DaveyJones, paradoxically yes!

Human beings are not actually separated from their environment, but only relatively perceive themselves as so. More profoundly, we do not know ourselves as the noumenon, but only know ourselves as phenomena to ourselves, just like everything else is not known as the thing in itself, but only as the appearance of some thing.

Therefore, humans "act" like robbers in their environment, BECAUSE THEY ACTUALLY ARE THEIR ENVIRONMENT.

Human beings "draw believable emotions to their performances" to the degree that they are attached to their relative illusions, such as perceiving themselves as separate from their environment. To that degree, the ego, operating its attachment to relative separation, operates through systems of illusions, or relative lies, whereby the mind has constructed a model of the world, with a model of itself, inside of that model of the world. Of course, we are as strongly attached to that illusion of self as we are informed of our relative survival as a toroidal vortex, by the evolutionary selection pressures which made us evolve to feel pain and pleasure, and therefore, to "act" on that basis.

From the relative subtraction of self from Self, or the part from the Whole, or the organism from its Environment, there then follows the relative reality of the boundary of that individual, across which relatively defined boundary that individual must obtain energy and matter, in order to continue living. Therefore, the relatively separated individual, or groups of individuals, MUST "ACT like robbers in their environment."

daveO's picture

You got 10 uppies for that? EPA workers? Trust fund babies with their money in Exxon?

daveO's picture

It's caused by low interest rates creating Malinvestments. If rates were normal, oil prices would be over half as cheap. Then, only deep, rich reserves would have potential. North Dakota roughnecks are making over 6 figures. Back in the mid 80's, the ones I knew were making $7.50-8.50/hr. That oil boom occurred with interest rates in double digits(a real boom). I'll guarantee that field workers in the ME haven't seen a pay rise like that. It's an incredible Malinvestment.

Kirk2NCC1701's picture

It's all relative, but the really, really BIG reason is summed up in the words "Petro-Dollar".

W/o frikkin fracking, the USD can kiss its GRC status good-bye.

Dick Cheney's old outfit (Halliburton) is the poster child of fracking.

And then there's that MILF from Alaska: "Drill, baby, drill!" Hey, Palin, I got a new one-liner for you: "Frack and fill that crack!" Hey, I'm getting/claiming Copyright 2013 on that.

AngelEyes00's picture

Here's another good weblink for info. on shale oil:

Ron Patterson started that website.  He was the most prolific expert poster at the oil drum under the moniker 'Darwinian', before they started getting so controlling and chased off the best posters.  Anyway, it's a good website to frequent for peak oil information, including what's happening at the Bakken and other shale oil fields.  He only recently started it and it is building but the information and other experts going there are very well informed.

Jack Burton's picture

Flakmeister, I have read a lot of your posts on this energy issue, oil prices and especially the fracking boom. I believe you are taking a rational, evidence based view and that results in a common sense opinion on the fracking future. I tend to agree with most of your points on this issue. I can NOT see the costs of fracking ever going down, in fact, I think they are in a low point right now. The cost of money is zero, they have only begun to tap into local water supplies, that cost should rise as water in many places becomes an issue. Even things like frack sand are going to be an upward pressure on costs. Then there is the debate about how much oil these new wells produce after the initial gusher from the fracking process, over a short time that runs down and only trickles of oil come out. Then they need more drilling and blasting to open more shale up.

Input costs are dependent on leverage to fund. Right now zirp printing can feed zero cost cash into it. As she says above, that can not last.

Just as an aside, I made the drive to my Daughters for Thanksgiving, I cross south from the Boreal forests into the beginning of Upper Midwest farmlands. Down in the agricultural lands there is a border where the great glaciers stopped, and these deposited masses of sand at that border line. This year, in just a few months, six giant sand mines have opened, railroads have been built into the processing areas, and mass sand piles sit on the raw side waiting for processing and clean sand ready for loading on rail cars sits on the output side near the new rail spurs. I counted 6 within a 5 miles stip where the sand deposits lie. One after the other, each with it's won new rail spurs and I also saw a large railroad yard where the trains are formed up for the run to the fracking areas like out west in ND. Just the cost to mine the sand, process it for use, load it on trains and ship it to ND. Well, it can not be cheap, I hear the frackers are desperate for this smooth type clean brown sand that the area here has. One more big cost that conventional oil does NOT have.

Fracking will never, ever be cheap oil, it can't look at all the energy inputs, I bet the energy out ratio will continue to shrink, and at an alarming rate.

I think this woman above is smart, and I think she has used rational study, not patriotic hype. Fracking isn't going to bring in onther age of cheap gas and monster SUVs and monster Trucks in every driveway.