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July 7th, 2011

"The better is the enemy of the good."

"If it ain't busted, don't fix it."

First, it was "finding oil on Wall Street." Now, it's "finding oil in the Federal bureaucracy." The Energy Information Agency has discontinued their International Petroleum Monthly and substituted a New! Improved! data set. Suddenly, world oil production (around 73 million barrels per day) increased to 85 million barrels per day; an increase of 13 million barrels per day. In contrast, OPEC might, or might not, be able to increase production by 2 million barrels per day.

The old EIA data set reported how much liquid petroleum came out of oil wells; a useful thing to know. I joke that their new data set includes all the switchgrass in Missouri. The EIA web site was always difficult to navigate, but now I get the feeling that the EIA doesn't want me to find the unembellished oil production figures.

2005 is still the year of greatest oil production. That makes me feel happy all the way down to the tips of my toes.

Rather than listening to me moan, look at Gregor Macdonald's web site at His most recent posting (on April 28, 2011) shows the depth of the problem. His previous posting (on January 14, 2011) shows his reconstructed data. The second graph in his January 14 edition shows that 2005 is still the year of greatest oil production. That makes me feel happy all the way down to the tips of my toes.

NY Times damage, Fukushima damage

On June 25 the NY Times carried a front-page story about natural gas production from shales. The Times piece claimed that the natural gas industry was full of overblown reports and exaggerated profits. It was a devastating evaluation. I read the story on the Internet just before going to bed and I dozed off thinking that the Times had trashed the natural gas industry, Fukushima blew away the nuclear industry, and coal is too carbon-rich to burn. We had nothing big left to pull us out of the recession.

In the cold gray light of morning, I woke up saying to myself, "It's the price, stupid." At times in the past, natural gas has tracked the price of oil using the energy equivalent of one barrel of oil to 6000 cubic feet of natural gas. So the price of 1000 cubic feet of natural gas would usually be one-sixth of the price of a barrel of oil. As of today (July 7, 2011) West Texas Intermediate crude oil is $98.57 per barrel and North Sea Brent crude is $119.63 per barrel. The expected energy-equivalent price of natural gas would then be between $16.423 and $19.63, but natural gas was actually selling at $4.15 per 1000 cubic feet. Wow! Natural gas is one gigantic bargain, selling at one-fourth of the energy-equivalent price of oil.

If the natural gas industry is doing something sneaky, my first reaction is for them to keep on sneaking. Part of the rush to develop gas from shales is a typical grab for the "sweet spots" or "fairways" within the larger target area. If a company waits until the sweet spot is identified, it's too late. All the good land is gone.

As for the fast decay rate of natural gas wells, the public would like to hear that each well will chug along for thirty years, happily delivering a dollop of gas each year. But think of the decay rate from the investor's side. Would like to pass the trickle of earnings on to your grandchildren, or would you like to have your payout quickly? You can choose between a wimpy little hydrofrac job and a massive hydrofrac. Wimpy is for your grandchildren and massive is so that you can take your initial payback in a couple of years and go on to another investment.

Chesapeake Energy Corporation is not a charity. Neither Chesapeake nor any other company is downpricing natural gas as a deliberate favor to the rest of us. It could happen that some companies are making mistaken investments and sales, but it is not necessarily deliberate fraud. Sometimes, people and companies believe their made-up stories and are their own first victims. My take is that the low price for natural gas actually reflects production from major new source of gas.

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