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Thoughts from the Frontline

Peak Oil or Peak Energy? – A Happy Solution

December 10, 2012

Choose your language

A consistent theme in this letter has been the connections between items that may seem to be far removed from each other but are actually linked at the very core. If you push on one end you get a reaction in what would seem to be the most unlikely spots. Today we explore the connection between the fiscal deficit and energy policy. Everyone in Washington is starting to “get religion” about wanting to fix the deficit, with serious thinkers on all sides acknowledging that there must be reform and a path to a balanced budget. Burgeoning healthcare and Social Security costs are rightly pointed to as the problem, and entitlement reform will soon be front and center.

But the fiscal (government) deficit in the US cannot go away unless we also deal with the trade deficit. As we will see, it is a simple accounting issue, and one based on 400 years of accepted accounting principles. And dealing with the trade deficit in the US means working with our energy policy.

The trade imbalances among the partners in the eurozone are at the heart of the problems there as well. And while we will get back to Europe in a few weeks (remember when we seemed to be focused on Europe and Greece for months on end?), today we will explore the trade problem from a US perspective. Happily, this problem, while serious, does have a workable solution. And it might even happen in spite of government policy, though if a proactive energy policy were developed, it could ignite a true economic renaissance.

I have been wanting to explore the implications of the shale oil revolution. Old oil fields are wearing out, as peak oil advocates point out. Where can we find the huge and cheap-to-exploit oil fields to replace them? Hasn’t all the easy oil already been found? We will start in the Texas of my youth, journey to North Dakota where I was last week, and then think about the implications of that journey. There are many connections and interesting paths to explore. The letter will print a little long, as there are a lot of charts.

Looking Over My Shoulder

But first, this is the month when economists and investment analysts trot out their annual forecasts. I traditionally make mine the first week in January, after I read scores of other forecast the last three weeks of the year. It’s just something I have done for many years. I make a point of reading those I suspect I might disagree with to help me with my own thinking. It…

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Dec. 12, 2012, 5:22 a.m.

John,  I strongly urge you to rewrite this article after studying the terminology in this field and checking some of your numbers.  I believe your analysis and conclusions would probably be very different. 

Chris Harto pointed out only one of many important definitions that need attention.  As Chris points out: for starters you need to understand the difference between “shale oil” and “tight oil”  and the wikipedia article he suggested is a good start. 

And also a very good condensed intro to some of the basics can be found at: 

I think you will find the above paper very interesting and helpful.

I concur with Chris’s points about the 2 Trillion barrels of “shale oil” (which by the way CANNOT be extracted by fracking )!!
The “oil shale” which is the rock….. notice the difference from “shale oil”.... must be mined, then “cooked” at around 700 degrees Fahrenheit (or chemically treated) to render a suitable “shale oil” liquid product that can then be piped or transported. In other words it isn’t an oil until the Ore is mined and then baked.  Then, unlike coal, which you transport and then burn somewhere else,  you have the problem of mountains of oily tailings and I mean MOUNTAINS.

But it is even worse :  According to the USGS estimate, those 2 Trillion Barrels of oil are labeled “In-Place” oil where “in-Place” is another important qualifier meaning:

intended to represent all of the oil, natural gas or coal contained in a formation or basin without regard to technical or economic recoverability.  Because only a SMALL portion of the total amount of the fossil fuel in a deposit is ever recovered there are often large discrepancies between volumes of in-place resources and the proportion of those resources that are technically recoverable.

The numbers I’ve seen suggest that only about 180 billion barrels of the 2 trillion “in-place” potential can be recovered.  And remember you cannot use fracking to extract the “shale oil”.  You must use a really really dirty mining and retorting method.

I have only scratched the surface.  Please take some time to educate yourself on the technology and carefully check your sources.

I think once you look at and understand the correct estimates of how much fossil fuel Resources and Reserves we actually have (check those definitions)  you may come to a different conclusion than in your original piece.

There are numerous studies that have indicate that we will not be totally energy independent.  We may be close for some time, but we will never be totally independent even if we forbid sale of these precious natural resources outside of the U.S.

I think you owe it to your readers. They need accurate data to make investment and political decisions.

Dec. 11, 2012, 10:24 a.m.

John, enjoyed your letter.  I would like to add my observations regarding oil shale reserves.  I am a petroleum engineer/geologist with 60+ years of professional experience.  I am very familar with the Bakken oil reservoirs.  I should point our that every location within the confines of the Bakken will find oil - how much is the problem.  The “sweet spots” give prolific oil production - some wells intially produce as much as 3,000 barrels of oil per day.  However, they decline rapidly, and after 12-18 months of production they are likely to be capable of only producing a couple of hundred barrels per day.  At this point it is necessary to re-frac the well to increase production.
The Bakken resource amounts to about 600 billion barrels of oil in place of which only a small % can be recovered as oil reserves.  The recoverable reserves may eventually be as much a 15 or so billion barrels, but may be much less.  Well costs are in the range of $6-7 million dollars including fracing.  It is expensive oil.
Shale oil is a different “cat”.  It is an earlier form of petroleum - kerogen.  There are trillions of barrels in place, locked in shale bodies.  Mainly, in the Rockies.  However presently there is no commercially viable system to mine and refine it.  First of all it mining it creates a horrendous enverionmental problem, since the residue is a flour-like substance that must be dealt with. I did some work on the shale oil resouces in the Rifle, Colorado region in the early 1950s.
I add that I am familar with many of the basins that contain oil shale formations - the same factors, as in the Bakken, hold true.
As a quick add - Geo. Mitchell and I have been personal friends for over 50 years.  His older brother, Johnnie,  and I were also personal friends - Johnnie had a serious stroke many years ago and lingered for close to 12 years before passing away.  I consulted for Christie, Mitchell & Mitchell in the late 1950s and also knew Christie (never forget his trademark -  dark blue-lensed sunglasses).   e-book - The Sky Will NOT Fall - Unmasking the Green Revolution (Amazon, Barnes & Noble).

Lawrence Herron

Dec. 11, 2012, 9:46 a.m.

It would be helpful to point out that your formula about debt reduction refers to FOREIGN DEBT only. Obviously, even if the current balance were negative, it would still be possible to reduce both public and private DOMESTIC DEBT simultaneously. It should also be noted that the vast majority of U.S. debt, both public and private, is DOMESTIC. So the main debt problem in the U.S. doesn’t revolve around exports, it revolves around domestic borrowing. But in the periphery of Europe, foreign debt IS the problem, hence exports there are critical and are basically a zero sum game within the Euro.

Dec. 11, 2012, 6:47 a.m.

Can you answer two questions, out of your own immediate knowledge, without Google, without asking colleagues, but from your own direct understanding?
1. Why does methane absorb more infrared than nitrogen or oxygen?
2. If you park a car outside on a clear night with temperatures a little below freezing, why does more frost form on the roof than on the doors?
If you don’t know, how do you evaluate claims about climate science and global warming?
If you don’t know, you are not equipped to understand that burning the world’s oil shale and shale oil will be a disaster.  But at least it’s better than burning coal.  (Do you know why that is?)

Dec. 11, 2012, 3:43 a.m.


Overall I found your piece to be largely accurate and fair and balance. However you did make one common mistake when discussing shale oil.

The following statement is not true:

“A quick tutorial on shale oil: Global shale oil reserves are currently estimated at over three trillion barrels recoverable under current technology. The US has well over two trillion of those barrels. (Average estimates from numerous sources.)”.

The issue here is that there are two very different resources with very similar names. Shale oil and Oil Shale. Shale oil which you describe in your article is essentially conventional oil that is trapped within tight shale layers that requires horizontal drilling and hydraulic fracturing to extract. The reserves for this type of oil are not in
significant as evidenced by the Bakken and Eagle Ford and growing number of emerging shale plays, but they do not come close to the 2 trillion number quoted.

The 2 trillion barrel resources is oil shale. This is a VERY different resource. Oil shale is a substance also known as Kerogen. It is more similar to oil sands than shale oil. It exists geologically as a solid and must be heated to high temperatures, generally consuming large quantities of energy and water to extract the oil (actually bitumen, the same heavy oil found in oil sands).

There have been efforts in the past to economically exploit oil shale in the Rockies, but none have been economically successful due to the large energy requirements and low energy return on energy invested (EROI). The oil shale resource is indeed huge and if it can ever be extracted economically it will become a game changer, but the basic thermodynamics of the process ensure that it will probably never be done cheaply.

PS I initially posted this with the FB plugin, but I’m not convinced that it worked correctly.

Martin Wolff

Dec. 11, 2012, 1:31 a.m.

It seems to me that the goal, long term, is to be the last country pumping oil, gas or whatever. Once you have extracted everything you have, you are at the mercy of the remaining countries that still have the stuff.
Keep extracting the stuff, obviously, and invest in technology to get to the harder stuff but as a long term strategy, use the other guys crude before you use your own. In fifty years, or whenever, as the only producer America can name her price and all those debts will magically disappear. I know that means looking after a future generation above a current one, but isn’t it about time?

David Oldham

Dec. 10, 2012, 11:53 p.m.

Very interesting article John and maybe the water issue will ultimately be resolved by the scientists.

Wishing all a very Happy Christmas.

Dec. 10, 2012, 5:30 p.m.


As an oil and gas professional I would like to thank you for writing this piece. It is a breath of fresh air in a world of false documentaries and media reports that have misled the public regarding the safety of fracking technology. While I may be biased, my knowledge of unconventional drilling does not alienate my values to protect the future of our environment and our water. I very much appreciate the time that you took to accurately report on this subject. I know that you have a large following and it will go a long way toward educating the public on the virtues of this technology. We are at the very beginning of a magnificent oil boom that will only end in much lower oil prices.

Dec. 10, 2012, 3:30 p.m.

John, I’m not an investor of any kind other than investing what little I can in our drought-y 10 acres (Southwester Colorado). We have 1 gas well on about every 40-80 acres in our county(unmarked BP trucks to these sites, mostly). There is a whole lot of argument going on about fracking here, for many reasons.  My personal insight is that our business takes us into many homes in the area and we’ve experienced first-hand water on fire from faucets, and even homes blowing up from released methane (it is ‘supposed’ to be contained or captured). Like UFO sightings, it is always dismissed as ‘natural causes’. Many people have to have water trucked in to drink after their wells get chemically altered with scary ‘stuff’. At the other end, we see a lot of disparity between the incomes of those who can and do invest and those that don’t and it often is because of the gas industry perks vs lack of ‘oil money’ coming in. Many of the nicest homes we have serviced have pictures like royal portraits of the former President and his wife on the wall - the homes appear to be affordable because they also have some oil money coming in; they can appreciate the financial perks the industry offers. There are others living here who are working 2 or 3 jobs just to maintain themselves with the basics. (As costs go up this is harder all the time).
I agree with much you have laid out, like: “...oil prices will have to remain high or go even higher for shale oil to be profitable. I think he is right on that. I have always maintained that we are not likely to run out of oil for a very long time; we will just run out of cheap oil.” But, I think you left out one of the most important considerations in assessing this booming industry, and while I can’t argue the point, I can point to many online sources on this topic. It concerns us all over the long term, especially with the drought issues now pervasive in gas-drilling states: water usage in the drilling/fracking. Please consider this point.
Water is ‘free’ in that we (or BP, et al) can find sources of it at no cost (but the trucking of it to well sites), but I don’t think it’s fair not to put a cost on the loss of that water, when the industry uses so much of it and ruins it while people need it for drinking or farming, or just the security of the water tables during continuing drought conditions. It seems like stealing to me and actually kinda freaks me out how this is never mentioned in regards to the ‘boom times’ for this industry and all the money people get from it while others do and will suffer in some way.

I respect you (I even like you!) and appreciate your informative articles that keep me up on some aspects of the financial happenings. I am not as optimistic as you are, due to some things, like big companies seeking money over important things which are overlooked and discounted in the pursuit of that money. I think it isn’t all about money, but then maybe that is the difference between me and someone who can invest it.
Thanks for the opp to respond.

Craig Rodby

Dec. 10, 2012, 2:17 p.m.

We are trading fresh water for oil.

Even with the best technology, we are leaving more than 70% of the fresh used to drill the wells in the hole. We need roughly 4 million gallons, on average, of water to drill one well, and we are drilling 35,000 wells are year.

And given the global warming implications of the methane release, this will not end well