Posted on 09/02/2019 10:30:23 AM PDT by LS
Several months ago I reviewed here Peter Zeihan's book, "The Accidental Superpower." It was an informed and at times shocking look at current trends. Zeihan is a group of "futurists" whose economic forecasting firm advises corporate clients. The analysis is so thorough & complex, I will develop it in three threads as he has divided his book into three parts. This is the first section.
In his newest book, Zeihan reiterates and updates much of what he said earlier, beginning the the profound impact---indeed revolutionary impact---of shale. He analyzes the various forms of petroleum products, arguing that shale is entering its second revolution. The first revolution was the discovery and rapid expansion into shale fields. Because the price of oil was so high, the first shale revolution involved a large number of risky and innovative methods to obtain shale. Even expensive shale-recovery was profitable in the high oil-price world prior to 2015.
But after oil prices fell, shale entered a second revolution in which the riskiest and least-rewarding procedures were dropped in favor of tried-and-true recovery methods, but, more important, drillers learned how to take advantage of new technologies that included "walking rigs," "pad drilling," longer laterals, and perhaps most important, micro-seismic imaging. Drillers also used multilateral drilling, laying multiple pipes off a single stem at multiple levels, like an inverted stack of old television antennae. And these methods were further enhanced by new "re-fracking" and "infilling."
As Zeihan notes, the "total input cost PER WELL may be rising . . . but output is so much higher per well that the total cost PER BARREL is plummeting." He foresees a price structure around $25 a barrel settling in this year and in the near futures. "US shale," he notes, "is on the cusp of being cost-competitive with Saudi oil."
But there is a third shale revolution---this one going on concurrently with the second---which is the massive increase in natural gas production associated with shale. He points out that "the most versatile industrial input in existence, the basic building block of modern society, in the United States is a WASTE product." By 2020, he predicts, natural gas---again, a by-product of shale---"will generate more electricity than ALL other forms of generation combined."
Someone might wanna notify Occasional Cortex (aka, Dead Eyes).
The implications for employment are enormous. Total pre-shale employment in the direct energy support sectors was 490,000, but right before the Saudi price war in November 2014, that sector had doubled. He argues that far from the Saudis dictating developments in shale's initial job losses, those were factored in and predicted before the price drops. Between 2007and 2013, half the new jobs in the US were related to shale production, while from 2014-15 half the jobs lost were from those same categories.
He notes that shale has already saved the average family $1,100 a year in cheaper gas and another $750 a year in cheaper electricity; and that while his study that formed the basis of this book was completed in 2015, he predicted the break-even point for shale was a price of $75 a barrel.
Two years later, it was half that. That number translated into 3m new jobs by 2020 and he admits that his forecast was, in fact, the lowest case estimate.
Zeihan then shifts to a discussion about the labor implications of the new shale revolution, in which the "rote, book-learning many countries excel at is important in the development of engineering skills, it is only the BEGINNING of the shale skill set." Shale wells vary not field by field, nor well by well, but stage by stage. "Petroleum engineers who work the shale patch need (lots) of hands-on expertise in geology, fluid dynamics, metallurgy, and a host of other skills. The list of countries that teach such integrative, critical thinking en mass at all---much less teach ENGINEERS how to think outside the box---is very short.
Even if countries could teach this, that would only get that country to the first shale revolution, while all the new techs like micro-seismic and multilateral drilling require far more advanced experience than existed just five years ago.
"It isn't so much that the U.S. has the best petroleum engineers in the world (although it does). It isn't so much that the U.S. has more petroleum engineers than the rest of the world combined (although it does). It's that anyone hoping to duplicate the end results of the American skilled labor market can do so only by building it from scratch. . . . No amount of study can help because there are no manuals to read just yet. You can only learn by DOING, and you can only DO within the confines of an already-active shale industry.
Now Zeihan gets into an area that warms my heart, the impact of private property laws. The issue is that in most countries the lack of basic private property ownership restricts all mineral rights to the government. There is, he points out, just one exception: the USA. Because of this, a drilling permit in the US can be obtained in two CALENDAR days, while the average in the rest of the world in 2015 was 220 BUSINESS days! As a result, there is virtually NO shale operations on public lands.
Or how about capital? "Most countries simply lack the sort of financial depth required to even attempt a small shale industry. Of the maybe 60 countries that theoretically could attempt to finance a shale boom, all but a handful would see the cost of finance rise so precipitously that it would almost certainly cause a finance-induced recession . . . ." Then there is the infrascturcure: The US began with a massive lead in pipeline, with more than 300,000 miles of natural gas trunkline already installed. Now, nearly 1m miles of NEW pipeline has been laid, and the US has 8,000 natural gas power plants.
Do other countries have shale? Of course, but it is not nearly as accessible, even if they had the engineers, transportation/piping infrastructure, and climate that would allow access (think Siberia). China projected that by 2020 its shale industry would produce 10 billions of cubic feet of natural gas per day . . . but real output was 0.43 and the 2020 estimate was revised downward by more than 2/3s.
Today, the U.S.'s energy cost structures are lower than Alberta, Canada's, making it more expensive to buy Canadian fuels than domestic, leading the Canadians to explore shale---which itself is by definition an admission of the failure of Canada's energy policy.
Zeihan concludes part I by saying "Only the United States has the magic blend of geology, legal and regulatory environment, available capital, and above all the experience and know how to make shale work on a massive scale."
I will continue with the review of his part II later this week.
Well done. TY. If the barrel price of shale oil comes down to $25, the Saudis will eventually go bankrupt, and American consumers would be very happy with the price of gasoline.
I worry about major disruptions if supply is not sufficient beyond 20 -30 years. Long after I will be pushing up the daisies, I'm sure.
America is genuinely blessed with the resources to produce/extract raw energy. The question becomes do we have the will to create the means to convert those resources into useable energy?
Based on his stuff, 100 years minimum.
Well done. TY. If the barrel price of shale oil comes down to $25, the Saudis will eventually go bankrupt, and American consumers would be very happy with the price of gasoline.
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With the left and the Islamists conspiring to destroy the “great satan” perhaps this explains why they are pushing “green new deal” so hard. They kill two birds here. One; they socialize America and destroy our development and use of fossil fuel. Two; they enable the muslim world to keep monopoly on oil production thereby continuing the funding of the jihad against the west.
Excellent analysis.
Worth reading the whole thing carefully.
Thanks for posting.
LS, this is an amazing analysis. Will you give permission to reprint and share?
Thank you, Larry, for taking the time to write this informative and easy to understand review.
Brings back my worry pre-election ‘16 about the effect of a Clinton regime on our burgeoning shale industry. One of many reasons why a Republican with understanding of the critical importance of deregulation had to be elected, i.e., only Trump, never anyone from the political world.
Sure.
Thank you.
“Most countries simply lack the sort of financial depth required to even attempt a small shale industry.” Suspicious simply because I cannot think of another country that can do shale work.
Same engineers worked on the XB-15 rocket plane in 1960 and shale gasification in 1980 in Canoga Park, CA. Shale gasification is totally easy compared to the XB-170 and XB-15 rocket planes.
It is a crime that Canoga Park now has gas for $3.43 a gallon. It should be $1 per gallon maximum.
$25/bbl!
That will rock the world. It is going to significantly support the US economy, for the long haul.
I think that global demand is growing faster than US production, so market prices should stay well higher than that. But the surge in American production (an additional 1.5 million barrels per day, every year) will be a strong force keeping prices from going very high. OPEC has already lost a lot of their former power to drive up prices.
If/when recession drops demand growth below our production increases, it will be other (higher cost) producers that lose market share, rather than us. With such a low cost of production, our continued production growth is insulated from the business cycle.
Pumping oil is like printing money - without the inflationary hangover. It is a gusher of real wealth, and stimulates a bunch of other basic industries, like steel and transportation.
While I disagree with the author’s opinion that other nations around the world will not be able to frack for oil and gas, let me sing the praises of American Frackers.
IMAGINE, without fracking (and Trump’s unshackling of the industry) what the cost of oil would be when Iran said they’d block the Strait of Hormuz.
We’re talking over $100 bbl. in a hurry.
His argument is NOT that they don’t have the oil to frack; but that it is so remote and difficult to get to (Russia), or that they don’t have anywhere near the engineering know how to get it (everyone else), or that the military tensions in the regions make long-term investment there impossible or near impossible.
I said I disagree with his opinion regarding those issues. While true in some areas it’s not true in all of the world except the US.
Plus, Americans who know how to do this job will be richly rewarded in other places for their skills.
Capitalism is a wonderful thing.
Yes, they will be rewarded . . . but not if it is in a global conflict, or not many at least. Just as in the early stages of WW II there were Americans who fought on, or sold to, both sides until the US got into the war.
But I don’t see how there can be much disagreement over where the shale is in a place like Russia. It is incredibly distant, in frozen over tundra, with virtually no support structures at all.
It is somewhat more accessible in China, except that it’s in provinces that aren’t exactly the most secure for the ChiCom government.
There’s a lot more world than China and Russia. That’s what I mean.
True. But again, in that “lot more world,” you still have extremely serious recovery problems with fracking, the most basic of which is complete lack of infrastructure and educated personnel, not to mention laws that would permit investors and workers to recover any profits from sunk (literally) investment there.
I like the sound of this.
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