Earlier this year, I offered two posts [here & here] on Perfect Storm – Energy, Finance and the End of Growth, a well-reasoned 2013 report issued by Tullet Prebon, a British financial services firm (in the wholesale financial and energy sectors), authored by its Global Head of Research, Dr. Tim Morgan.

I came across a piece from January discussing that report. The title of that very good article (by James Gruber) caught my attention: Why Shale Oil Boosters Are Charlatans In Disguise. Mr. Gruber’sobservations merit some notice and commentary, all the more so given the publication for which it was written. [Unless noted, quotes to follow are from Mr. Gruber’s article.]

[S]hale 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.

That’s one take, but it ignores/misreads a couple of key points. Shale oil [better characterized/more commonly referred to as tight oil] has led to an increase in production totals because high prices have been maintained. It’s a much more expensive process than production from conventional crude oil, and if high prices are not maintained, production won’t continue. So telling the public to wait for that drop in price is not all it’s cracked up to be. Lower production totals lead to a slowing economy, given how dependent it is on fossil fuel energy for just about everything.

The peak oil proponents argument rings a bit hollow. Basic economics [I’ll readily admit to struggling even with that subject matter] tells us that when supply declines, prices tend to rise. They did. And the short-term production hike from the shale formations is producing an energy supply not as energy rich as conventional crude—there’s not the same bang for the buck. Mr. Gruberhimself pointed that out.

Production is more energy-intensive also, and given the very high decline rates for shale wells [upwards of 60% in the first year], a lot more wells need to be drilled to keep up the pace. With the “sweet spots” already explored, industry is not moving down the line to the not-so-sweet secondary resources. So there are some important qualifiers in discussions about the “boom.”

What was more significant were Mr. Gruber’s observations and acknowledgment that the days of cheap energy are behind us [citing Morgan’s work]. With the loss of cheap energy comes a slowdown in growth, as others have likewise explained. This author went to so far as to state that “future growth will be permanently impaired.”

That would not be considered good news.

Mr. Gruber was quick to realize a key factor emphasized in Dr. Morgan’s report, the importance of the amount of energy “left over” after deducting the input needed to provide supply [referred to as EROEI: the Energy Return On Energy Invested]. The reality is that the amount left over in shale production is less than that afforded by conventional crude oil. Less conventional crude available to us and less available energy from its primary substitute is not good math.

He adds:

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.
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.

All of the “less” mentioned above won’t help make that possible. And as Mr. Gruber notes:

[P]olicymakers who pin their hopes on shale oil reducing energy prices are seriously deluded.
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.

Dr. Morgan’s conclusion is that the diminishing EROEI will lead to our familiar economy ceasing to be “viable” in the next decade absent something close to a miracle. Also not good….Mr. Gruber has his reservations about that somber assessment.

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.

In my humble opinion, if further evidence is needed, it won’t take much.

~ My Photo: Fenway Park, Boston from the Green Monster seats – 04.19.14


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