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James Stafford

James Stafford

James Stafford is the Editor of Oilprice.com

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Don't Fall for the Shale Boom Hype - Chris Martenson Interview

We are in the midst of an amazing energy boom, but by sweeping the idea of peak oil under the rug we are ignoring a significant fact: the relationship between hydrocarbon reserves and flow rates are not the same as they used to be—reserves have increased but flow rates are not as high or sustainable.

Perhaps the most important thing we need to pay attention to is net energy returns, on which we run society. Massive new discoveries are only netting a fraction of the returns compared to earlier decades.

While we must proceed into the energy future with caution—and the knowledge that analysts may be overselling the shale boom—there are also, as always, major opportunities in this story and they can be found in the wider trends related to improving energy efficiency.  

Looking at our energy future in more detail we were fortunate to speak with the well known economist and author of the Crash Course Chris Martenson. You can find out more about Chris and the Crash course at his website Peak Prosperity.

In part 1 of our exclusive 2 part interview Chris discusses:

•    Why we shouldn’t talk about energy independence
•    What the media is failing to report about the “massive” Shale discoveries
•    How oil analysts are getting the economics wrong
•    Why we could see $200 a barrel Oil in the Near Future
•    The relationship between energy and the economy
•    Why peak oil is not a defunct theory
•    Why electric vehicles are the future
•    Why natural gas should be a bridge to a new energy future
•    Why Washington just doesn’t get it

Oilprice.com: You're well-known for talking about the dangers of peak oil. But are you more optimistic about the future now that we find ourselves in the middle of an energy boom—thanks to improved extraction methods like fracking and other technologies, which have opened up massive oil and gas plays once thought to be unreachable or too expensive to get to market?

Related Article: Falling Oil Prices and the Shale Boom: An Interview with Michael Levi

Chris Martenson: Good question. The relationship between energy and the economy is the most important thing that anyone can, and should, work to understand. In the past, we've always had whatever amounts of oil we wanted to support the sort of economy we operate, and that happens to be an economy that grows exponentially. The rate of growth that seems to work best at about 3% real and 6% nominal growth.

Now, between the 1960s and the 1980s, the world saw roughly a 6% per year growth in oil output. From 1980 to 2000, roughly 1.5%. And since then, almost flat, maybe a .1% growth in oil output.

So shale oil discoveries may be massive in terms of the total number of barrels of oil--but what they lack are high and sustained flow rates. And there's a lot of confusion out there in the press right now, with several analysts that should know better, waving their hands at increasing reserves and then making the utterly wrong conclusion that peak oil is a defunct theory.

Now, to illustrate this, imagine we just found a trillion barrels 40,000 feet down. Yeah, that would awesome, right? No more peak oil, at least for a long time, right? Well, what if due to technological considerations, we could only get a few wells installed, and the max flow rate we could get from that reservoir was 100,000 barrels per day. Oh, that's it? Well, that's nice, but it doesn't really help the overall situation, where we're experiencing roughly 4,000,000 barrels per day,per year declines in existing conventional crude oil fields. That is, reservoir size and flow rates were well-correlated several decades ago, because the stuff just flowed out of the ground so easily, but now that we have to drill tens of thousands of feet to achieve a single well flow rate on the order of 100 barrels per day/per well in the shale plays, or we even have to scoop up tarry sand in giant machines and then power wash the bitumen off of it, oil just don't quite flow quite like it used to.

There's a new relationship between reserves and flow rates, and it's a fraction of the old rate. And it's an entirely new world, and this has been missed by the less insightful analysts and commentators out there.  I am optimistic about the new reserves and flows but not because I happen to think they allow us to forget about the challenges and snap back to 'how things used to be.'  We're in a new regime of higher oil prices and that alone sets today well apart from the past.

Oilprice.com: In your crash course, you make an interesting point that America imports 10 million barrels of oil per day, which represents the same power equivalent as 750 nuclear plants. With the new oil fields opening up in the US, is it realistic to think that America could become energy independent?

Related Article: Shale Gas Will be the Next Bubble to Pop - An Interview with Arthur Berman

Chris Martenson: Energy independence is another confusing term that's recently, and I think regrettably, been introduced in the conversation. The various forms of energy are simply not interchangeable at this time. We have to consider them separately.

I've never thought that the US has an energy shortfall. We have a lot of coal, for example, but we do have a liquid fuel predicament. Right now, we move almost nothing from point A to point B using anything other than liquid fuels derived from petroleum. Together, electricity and natural gas account for perhaps 1% of everything that moves. I believe that we could and we should work very hard towards using electricity to move things, but to do so will require many trillions of dollars in investment in infrastructure, vehicles, storage technology.

I also believe we should use our remaining natural gas as a bridge fuel to get us to a new energy future that's durable and provides us with a high quality of life. If we were on a path towards using electricity and natural gas to move things around, then I would be willing to entertain the idea of energy independence as a useful concept, because then the various fuels would be swappable. However, we're not on any such path at all at this point in time, at least not meaningfully so.

We will not ever become energy-independent with respect to liquid fuels in the US unless demand absolutely craters due to an economic calamity of some sort.

Oilprice.com: Obviously making a change would take serious political will. Do you think that will exists at this point in time, or is it something that's going to happen when people get a nasty shock?

Chris Martenson: I think we're going to have to go with the nasty shock at this point. The political will just isn't there. Recent events have really confirmed for me that Washington, D.C. just doesn't get it. They really want to believe in the story that the US is a new energy powerhouse; just don't want to look at the complexities that are actually involved in the story at this point in time.

So will we change through pain or insight? Those are the two main avenues of change, either at the individual or cultural level. I truly believe that pain is probably the most likely way we're going to change in this story.  Maybe not - hope springs eternal - but from a betting standpoint change will follow pain.

Related Article: High Risk Investing - The New Trend in Energy: Interview with Andrew McCarthy

Oilprice.com: What do you see happening with the oil market in the coming, say, three to five years?

Chris Martenson: Despite all of the hoopla about tight oil, which I think has been oversold by the way, I remain focused on the fact that for whatever reasons, world oil production has been effectively flat for six years running despite a tripling in the price of oil. Brent crude remains solidly over 100 a barrel, and 2012 will be the highest yearly oil price on record for global oil.

So my ideas here are that oil's an utterly non-negotiable necessity of modern life. Demand for it is going to grow further on the world stage.  New oil discoveries all have a marginal cost of production that ranges from 60 bucks on the low end per barrel to 100 dollars per barrel on the high end. What this means is that my new floor, for the price of oil, is somewhere in the vicinity of $70 to $80 a barrel. That's my low end target.

On the upper end, so much depends on whether the world economy finally recovers, which is looking increasingly unlikely, or whether there are further geopolitical difficulties in the few remaining productive oil basins, notably West Africa and the Middle East. Should either or both of those regions see their oil production shut in for any length of time, I can easily see the price of oil doubling from here to $200 a barrel, with very dire effects on the struggling world financial system.

Oilprice.com: What are your thoughts on the situation we are seeing with declining net energy returns?

Chris Martenson: This is really the important part of this conversation. I think it's a subtle idea, but it's actually the most important one here, and that is that net energy returns are what we run our society on. And the net energy returns we're getting from these new finds are a fraction of those that we enjoyed in prior decades. So that surplus energy left over after exploring and extracting energy, that's the stuff on which our complex, just-in-time economy runs.

With less surplus or net energy, there's just less left over to do other things with, such as growing our debts--at nearly double the rate of underlying economic growth, which is what we've done for the past four decades. Or shipping billions of economic items tens of thousands of miles from low cost labor markets to high profit consumer markets. Those activities require net energy, and that's the part of this story that's really missing, that even if we have these large finds, the tight oil shale plays, the heavy oils, the ultra-deep water finds, the net energy we're getting back from those is just a fraction of what we used to get.

Continued in part 2, tomorrow.

In Part 2 Chris talks about:

•    How tight oil is being oversold
•    An idea for solving the storage and Battery problem
•    How price, not technology, has unlocked boom reserves
•    Why it’s about conservation now, not new technology
•    Why we should be concerned about another financial meltdown
•    Future opportunities for investors
•    Why exporting natural gas is a terrible idea
•    Why Governments should help renewable Energy innovation
•    Why net energy returns are the MOST important thing

Interview by. James Stafford, Editor Oilprice.com

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  • bmz on December 19 2012 said:
    "Together, electricity and natural gas account for perhaps 1% of everything that moves. I believe that we could and we should work very hard towards using electricity to move things, but to do so will require many trillions of dollars in investment in infrastructure, vehicles, storage technology."

    There is no technology which can use electricity to power 18 wheelers. That is not true for natural gas. Had the Republicans not filibustered the 2010 and 2011 Natural Gas Acts, we would be well on our way towards becoming energy independent by using natural gas as a transportation fuel.
  • Philip on December 20 2012 said:
    Economics is about the 'pragmatism' of politics far more than it is about the 'pragmatism' of economics...
  • PitBull Pappa on December 20 2012 said:
    "There is no technology which can use electricity to power 18 wheelers."

    Perhaps a better option to look into for that is biodiesel made from used cooking oil on a large scale? Not only is it cost effective and a way to recycle waste, but is a better fuel so use for engine longevity.
  • tahoe1780 on December 20 2012 said:
    18 wheelers - I agree, but this will help: http://seekingalpha.com/instablog/227454-john-petersen/1348171-epower-s-series-hybrid-electric-drive-unmatched-fuel-economy-for-heavy-trucks
  • Revert2Mean on December 20 2012 said:
    A podcast of this interview would be most welcome.
  • Benjamin Dover on May 28 2013 said:
    I agree with most points with one main exception. There are no alternatives that can sustain 7 Billion people. Maybe 1 Billion (and a lot of manual labour). So called renewables are not renewable and cannot exist without fossil fuel to support them. Bio-Diesel may have a place in extremely specialised circumstances it certainly is not a main stream solution. If anything it will make the problem a whole lot worse and a lot faster. (what are you eating, where does the fertiliser come from? arable land? water?) Gas sounds good but as peak oil bites and it already is, demand for gas will sky rocket. How long will that last? The bottomline. Growth based economics is not dead. It is death and always was. Maintaining the status quo is not an option. It simply won't work. There is no future for mankind with 7 Billion people. If we don't act now effectively there will be no future for any of us. Remember the fundamental flaws of economics. There are 3; 1. Growth is good. 2.Economics is about the efficient distribution of wealth, not resources. 3.Economics is based on ludicrous assumptions. In short it's lunacy. Good luck. It's already happening the problem is all the media is Govt controlled. You have to dig for the truth like little nuggets of gold.
  • Ceannaire on January 24 2014 said:
    The problem with biofuels, is not how they compete with food prices, destruction of arable land, and deforestation. It's how much oil goes into growing a bushel of corn, or any other crop for that matter. Our current criteria for expected yields is based on the assumption that you are using fertilizers, pesticides and giant tractors. If you were to want any sort of sustainable agriculture with or without oil biofuels cannot fit into that picture. I believe the current conversion of oil calories into corn calories is 6:1 or even worse.
  • Robert Ryan on July 10 2014 said:
    Two crucial matters that we had better take seriously:
    1. I would be very suspicious of the media "reassurances" that we are "swimming" in hydrocarbons. Look at all the oil company ad revenue that goes to the mainstream press. Need I say more? Further, if Peak Oil is really a myth as the skeptics claim then why on earth has oil consistently-for a number of years now-hovered at around $100.00 per barrel?
    2. It amazes me how little talk there is of using HEMP to provide fuel for motor vehicles. It is a hardy plant which is currently illegal to grow in the United States. What would be the energy return on investment if HEMP was widely used as a fuel source? I would love to hear more discussion about HEMP FUEL!

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