Oops! The economy is like a self-driving car

Back in 1776, Adam Smith talked about the “invisible hand” of the economy. Investopedia explains how the invisible hand works as, “In a free market economy, self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society at large.”

We talk and act today as if governments and economic policy are what make the economy behave as it does. Unfortunately, Adam Smith was right; there is an invisible hand guiding the economy. Today we know that there is a physics reason for why the economy acts as it does: the economy is a dissipative structure–something we will talk more about later.  First, let’s talk about how the economy really operates.

Our Economy Is Like a Self-Driving Car: Wages of Non-Elite Workers Are the Engine

Workers make goods and provide services. Non-elite workers–that is, workers without advanced education or supervisory responsibilities–play a special role, because there are so many of them. The economy can grow (just like a self-driving car can move forward) (1) if workers can make an increasing quantity of goods and services each year, and (2) if non-elite workers can afford to buy the goods that are being produced. If these workers find fewer jobs available, or if they don’t pay sufficiently well, it is as if the engine of the self-driving car is no longer working. The car could just as well fall apart into 1,000 pieces in the driveway.

If the wages of non-elite workers are too low, they cannot afford to pay very much in taxes, so governments are adversely affected. They also cannot afford to buy capital goods such as vehicles and homes. Thus, depressed wages of non-elite workers adversely affect both businesses and governments. If these non-elite workers are getting paid well, the “make/buy loop” is closed: the people whose labor creates fairly ordinary goods and services can also afford to buy those goods and services.

Recurring Needs of Car/Economy

The economy, like a car, has recurring needs, analogous to monthly lease payments, insurance payments, and maintenance costs. These would include payments for a variety of support services, including the following:

  • Government programs, including payments to the elderly and unemployed
  • Higher education programs
  • Healthcare

Needless to say, the above services tend to keep rising in cost, whether or not the wages of non-elite workers keep rising to keep up with these costs.

The economy also needs to purchase a portfolio of goods on a very regular basis (weekly or monthly), or it cannot operate. These include:

  • Fresh water
  • Food of many different types, including vegetables, fruits, and grains
  • Energy products of many types, such as oil, coal, natural gas, and uranium. These needs include many subtypes suited to particular refineries or electric power plants.
  • Minerals of many types, including copper, iron, lithium, and many others

Some of these goods are needed directly by the workers in the economy. Other goods are needed to make and operate the “tools” used by the workers. It is the growing use of tools that allows workers to keep becoming more productive–produce the rising quantity of goods and services that is needed to keep the economy growing. These tools are only possible through the use of energy products and other minerals of many kinds.

I have likened the necessary portfolio of goods the economy needs to ingredients in a recipe, or to chemicals needed for a particular experiment. If one of the “ingredients” is not available–probably because of prices that are too high for consumers or too low for producers–the economy needs to “make a smaller batch.” We saw this happen in the Great Recession of 2007 to 2009. Figure 1 shows that the use of several types of energy products, plus raw steel, shrank back at exactly the same time. In fact, the recent trend in coal and raw steel suggests another contraction may be ahead.

Figure 1. World Product Consumption, indexed to the year 2000, for selected products. Raw Steel based on World USGS data; other amounts based of BP Statistical Review of World Energy 2016 data.

Figure 1. World Product Consumption, indexed to the year 2000, for selected products. Raw Steel based on World USGS data; other amounts based of BP Statistical Review of World Energy 2016 data.

The Economy Re-Optimizes When Things Go Wrong 

If you have a Global Positioning System (GPS) in your car to give you driving directions, you know that whenever you make a wrong turn, it recalculates and gives you new directions to get you back on course. The economy works in much the same way. Let’s look at an example: 

Back in early 2014, I showed this graph from a presentation given by Steve Kopits. It shows that the cost of oil and gas extraction suddenly started on an upward trend, about the year 1999. Instead of costs rising at 0.9% per year, costs suddenly started to rise by an average of 10.9% per year.

Figure 1. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is "Compound Annual Growth Rate."

Figure 2. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is “Compound Annual Growth Rate.”

When costs were rising by only 0.9% per year, it was relatively easy for oil producers to offset the cost increases by efficiency gains. Once costs started rising much more quickly, it was a sign that we had in some sense “run out” of new fields of easy-to-extract oil and gas. Instead, oil companies were forced to start accessing fields with much more expensive-to-produce oil and gas, if they wanted to replace depleting fields with new fields. There would soon be a mismatch between wages (which generally don’t rise very much) and the cost of goods made with oil, such as food grown using oil products.

Did the invisible hand sit idly by and let business as usual continue, despite this big rise in the cost of extraction of oil from new fields? I would argue that it did not. It was clear to business people around the world that there was a large amount of coal in China and India that had been bypassed because these countries had not yet become industrialized. This coal would provide a much cheaper source of energy than the oil, especially if the cost of oil appeared likely to rise. Furthermore, wages in these countries were lower as well.

The economy took the opportunity to re-optimize. Part of this re-optimization can be seen in Figure 1, shown earlier in this post. It shows that world coal supply has grown rapidly since 2000, while oil supply has grown quite slowly.

Figure 3, below, shows a different kind of shift: a shift in the way oil supplies were distributed, after 2000. We see that China, Saudi Arabia, and India are all examples of countries with big increases in oil consumption. At the same time, many of the developed countries found their oil consumption shrinking, rather than growing.

Figure 2. Figure showing oil consumption growth since 2000 for selected countries, based on data from BP Statistical Review of World Energy 2016.

Figure 3. Figure showing oil consumption growth since 2000 for selected countries, based on data from BP Statistical Review of World Energy 2016.

A person might wonder why Saudi Arabia’s use of oil would grow rapidly after the year 2000. The answer is simple: Saudi Arabia’s oil costs are its costs as a producer. Saudi Arabia has a lot of very old wells from which oil extraction is inexpensive–perhaps $15 per barrel. When oil prices are high and the cost of production is low, the government of an  oil-exporting nation collects a huge amount of taxes. Saudi Arabia was in such a situation. As a result, it could afford to use oil for many purposes, including electricity production and increased building of highways. It was not an oil importer, so the high world oil prices did not affect the country negatively.

China’s rapid rise in oil production could take place because, even with added oil consumption, its overall cost of producing goods would remain low because of the large share of coal in its energy mix and its low wages. The huge share of coal in China’s energy mix can be seen in Figure 4, below. Figure 4 also shows the extremely rapid growth in China’s energy consumption that took place once China joined the World Trade Organization in late 2001.

Figure 3. China energy consumption by fuel, based on BP 2016 SRWE.

Figure 4. China energy consumption by fuel based on BP 2016 Statistical Review of World Energy.

India was in a similar situation to China, because it could also build its economy on cheap coal and cheap labor.

When the economy re-optimizes itself, job patterns are affected as well.  Figure 5 shows the trend in labor force participation rate in the US:

Figure 4. US Civilian labor force participation rate, based on US Bureau of Labor Statistics data, as graphed by fred.stlouisfed.org.

Figure 5. US Civilian labor force participation rate, based on US Bureau of Labor Statistics data, as graphed by fred.stlouisfed.org.

Was it simply a coincidence that the US labor force participation rate started falling about the year 2000? I don’t think so. The shift in energy consumption to countries such as China and India, as oil costs rose, could be expected to reduce job availability in the US. I know several people who were laid off from the company I worked for, as their jobs (in computer technical support) were shifted overseas. These folks were not alone in seeing their jobs shipped overseas.

The World Economy Is Like a Car that Cannot Make Sharp Turns 

The world economy cannot make very sharp turns, because there is a very long lead-time in making any change. New factories need to be built. For these factories to be used sufficiently to make economic sense, they need to be used over a long period.

At the same time, the products we desire to make more energy efficient, for example, automobiles, homes, and electricity generating plants, aren’t replaced very often. Because of the short life-time of incandescent light bulbs, it is possible to force a fairly rapid shift to more efficient types. But it is much more difficult to encourage a rapid change in high-cost items, which are typically used for many years. If a car owner has a big loan outstanding, the owner doesn’t want to hear that his car no longer has any value. How could he afford a new car, or pay back his loan?

A major limit on making any change is the amount of resources of a given type, available in a given year. These amounts tend to change relatively slowly, from year to year. (See Figure 1.) If more lithium, copper, oil, or any other type of resource is needed, new mines are needed. There needs to be an indication to producers that the price of these commodities will stay high enough, for a long enough period, to make this investment worthwhile. Low prices are a problem for many commodities today. In fact, production of many commodities may very well fall in the near future, because of continued low prices. This would collapse the economy.

The World Economy Can’t Go Very Far Backward, Without Collapsing

The 2007-2009 recession is an example of an attempt of the economy to shrink backward. (See Figure 1.) It didn’t go very far backward, and even the small amount of shrinkage that did occur was a huge problem. Many people lost their jobs, or were forced to take pay cuts. One of the big problems in going backward is the large amount of debt outstanding. This debt becomes impossible to repay, when the economy tries to shrink. Asset prices tend to fall as well.

Furthermore, while previous approaches, such as using horses instead of cars, may be appealing, they are extremely difficult to implement in practice. There are far fewer horses now, and there would not be places to “park” the horses in cities. Cleaning up after horses would be a problem, without businesses specializing in handling this problem.

What World Leaders Can Do to (Sort of) Fix the Economy

There are basically two things that governments can do, to try to make the economy (or car) go faster:

  1. They can encourage more debt. This is done in many ways, including lowering interest rates, reducing bank regulation, encouraging lower underwriting standards or longer term loans, taking out greater debt themselves, guaranteeing debt of non-creditworthy entities, and finding new markets for “recycled debt.”
  2. They can increase complexity levels. This means increasing output of goods and services through the use of more and better machines and through more training and specialization of workers. More complex businesses are likely to lead to more international businesses and longer supply chains.

Both of these actions work like turbocharging a car. They have the possibility of making the economy run faster, but they have the downside of extra cost. In the case of debt, the cost is the interest that needs to be paid; also the risk of “blow-up” if the economy slows. There is a limit on how low interest rates can go, as well. Ultimately, part of the output of the economy must go to debt holders, leaving less for workers.

In the case of complexity, the problem is that there gets to be increasing wage disparity, when some employees have wages based on special training, while others do not. Also, with capital goods, some individuals are owners of capital goods, while others are not. The arrangement creates wealth disparity, besides wage disparity.

In theory, both debt and increased complexity can help the economy grow faster. However, as I noted at the beginning, it is the wages of the non-elite workers that are especially important in allowing the economy to continue to move forward. The greater the proportion of the revenue that goes to high paid employees and to bond holders, the less that is available to non-elite workers. Also, there are diminishing returns to adding debt and complexity. At some point, the cost of each of these types of turbo-charging exceeds the benefit of the process.

Why the Economy Works Like a Self-Driving Car

The reason why the economy acts like a self-driving car is because the economy is, in physics terms, a dissipative structure. It grows and changes “on its own,” using energy sources available to it. The result is exactly the same effect that Adam Smith was observing. What makes the economy behave in this way is the fact that flows of energy are available to the economy. This happens because an economy is an open system, meaning its borders are permeable to energy flows.

When there is an abundance of energy available for use (from the sun, or from burning fossil fuels, or even from food), a variety of dissipative structures self-organize. One example is hurricanes, which self-organize over warm oceans. Another example is plants and animals, which self-organize and grow from small beginnings, if they have adequate food energy, plus other necessities of life. Another example is ecosystems, consisting of a number of different kinds of plants and animals, which interact together for the common good. Even stars, including our sun, are dissipative structures.

The economy is yet another type of a dissipative structure. This is why Adam Smith noticed the effect of the invisible hand of the economy. The energy that sustains the economy comes from a variety of sources. Humans have been able to obtain energy by burning biomass for over one million years. Other long-term energy sources include solar energy that provides heat and light for gardens, and wind energy that powers sail boats. More recently, other types of energy have been added, including fossil fuels energy.

When energy supplies are very cheap and easy to obtain, it is easy to ramp up their use. With growing supplies of energy, it is possible to keep adding more and better tools for people to work with. I use the term “tools” broadly. Besides machines to enable greater production, I include things like roads and advanced education, which also are helpful in making workers more effective. The use of growing energy supplies allows growing use of tools, and this growing use of tools increasingly leverages human labor. This is why we see growing productivity; we can expect to see falling human productivity if energy supplies should start to decline. Falling productivity will tend to push the economy toward collapse.

One problem for economies is diminishing returns of resource extraction. Diminishing returns cause the economy to become less and less efficient. Once energy extraction starts to have a significant problem with diminishing returns (such as in Figure 2), it is like losing energy resources into a sinkhole. More work is necessary, without greater output in terms of goods and services. Indirectly, economic growth must suffer. This seems to be the problem that the economy has been encountering in recent years. From the invisible hand’s point of view, $100 per barrel oil is very different from $20 per barrel oil.

One characteristic of dissipative structures is that they keep re-optimizing for the overall benefit of the dissipative structure. We saw in Figures 3 and 4 how fuel use and jobs rebalance around the world. Another example of rebalancing is the way the economy uses every part of a barrel of oil. If, for example, our only goal were to maximize the number of miles driven for automobiles, it would make sense to operate cars using diesel fuel, rather than gasoline. In fact, the energy mix available to the economy includes quite a bit of gasoline and natural gas liquids. If we need to use what is available, it makes sense to use gasoline in private passenger cars, and save diesel for commercial use.

Another characteristic of dissipative structures is that they are not permanent. They grow for a while, and then collapse. Later, new similar dissipative structures may develop and indirectly replace the ones that have collapsed. In this way, the overall system is able to evolve in a way that adapts to changing conditions.

What Are the Likely Events that Would Cause the Economy to Collapse?

I modeled the system as being like a self-driving car. The thing that keeps the system operating is the continued growth of inflation-adjusted wages of non-elite workers. This analogy was chosen because in ecosystems in general, the energy return on the labor of an animal is very important. The collapse of a population of fish, or of some other animal, tends to happen when the return on the labor of that animal falls too low.

In the case of the fish, the return on the labor of the fish falls too low when nearby supplies of food disappear, and the fish must swim too far to obtain new supplies of food. The return on human labor would seem to be the inflation-adjusted wages of non-elite workers. We know that wages for many workers have been falling in recent years, because of competition from globalization, and because of replacement of human labor by advanced machines, such as computers and robots.

Figure 6. Bottom 50% income share, from recent Piketty analysis.

Figure 6. Bottom 50% income share, from recent Piketty analysis.

Besides the problem of falling wages of non-elite workers, earlier in this post I mentioned a number of other issues that make the wages of these workers go less far. These include growing government spending, and the growing costs of education and healthcare. I also mentioned the problem of rising debt, and the increased concentration of wealth, as we try to add complexity to solve problems. All of these issues make it hard for “demand”–which might also be called “affordability”–to be sufficiently great to allow commodity prices to rise to the level producers need for profitability.

Prices Play a Very Important Role in the Economy

The pricing system is the communication system of the economy, as a dissipative structure. One use of energy is to create “information.” Prices are a high level form of information.

One big area where prices come up is with respect to the whole portfolio of products needed on a regular basis, which I mentioned earlier (water, food, energy products, and mineral products). In order for the system to continue working, the prices need to be both:

  • Affordable by consumers
  • High enough for producers to cover their costs, including a margin for taxes and reinvestment

Now, in 2017, prices are “sort of” affordable for consumers, but they are not high enough for producersOil companies will go out of business if these low prices persist.

Back in 2007 and 2008, we had the reverse problem. Prices were high enough for producers, but too high for consumers (especially non-elite workers). This is a big part of what pushed the economy into recession.

We noticed back in Figure 1 that quantities of energy products/goods tend to move up and down together. A similar phenomenon holds true for prices: commodity prices tend to rise and fall together (Figure 7).  The reason this happens is because when the world economy is moving swiftly forward (higher wages, more building activity, more debt), demand tends to be high for many different types of materials at the same time. When the economy slows, prices of all of these commodities tend to fall at the same time. Inflation tends to fall as well.

Figure 6. Prices of oil, call and natural gas tend to rise and fall together. Prices based on 2016 Statistical Review of World Energy data.

Figure 7. Prices of oil, coal and natural gas tend to rise and fall together. Prices based on 2016 Statistical Review of World Energy data.

If prices cannot rise high enough for producers, it is likely a sign that wages of non-elite workers are already too low. The affordability loop mentioned earlier is not being closed, so prices cannot stay up at a high enough level to maintain production.

Most Modelers Overlook the Fact that the Economy Is an Open System

Most energy models are based on one of two views of the world: (1) fossil fuel energy supply will eventually run short, so we must use it as sparingly as possible; or (2) we want to reduce the use of fossil fuels as quickly as possible, because of climate change. Because of these issues, we want to leverage the fossil fuel energy we have, to as great an extent as possible, with energy that we can somehow capture from renewable sources, such as the solar energy or wind. With this view of the situation, our major objective is to create “renewables” that use fossil fuel energy as efficiently as possible. The hope is that these renewables, together with the actions of governments, will allow the economy to gradually shrink back to a level that is somehow more sustainable.

Implicit is this model is the view that the economy, and the world in general, is a closed system. Our current government and business leaders are in charge; they can make the changes they would prefer, without the invisible hand causing an unforeseen problem. Very few have realized that the economy cannot really shrink back very much; past history, as well as the nature of dissipative structures, shows that economies tend to collapse. The only economies that have at least temporarily avoided that fate have shifted toward less complexity–for example, eliminating huge government programs, such as armies–rather than yielding to the temptation to add ever more complexity, such as wind turbines and solar panels.

The real situation is that we have a here-and-now problem of too low wages for non-elite workers. Commodity prices are also too low. Intermittent renewables such as wind and solar are thought to be solutions, but it is well-known that intermittent renewables cause too-low prices for other types of electricity generation, when added to the electric grid. Thus, they are likely part of the low-price problem, not part of the solution. Temporary solutions, if there are any, are likely in the direction of cutting back on government expenditures and reducing regulation of banks. In fact, with the election of Trump and the passage of Brexit, the economy seems to again be re-optimizing.

We also know that dissipative structures do not shrink back well, at all. They tend to collapse, instead. For example, you, as a human being, are a dissipative structure. If your food intake were cut back to, say, 500 calories per day, how well would you do? If you could not get along on a very low calorie diet, how would you expect the economy to shrink back to a renewables-only level? Renewables that can be used in a shrunken economy are scarce; we don’t have a huge number of trees to cut down. We cannot maintain the electric grid without fossil fuels.

The assumption that the economy is a closed system is pretty much standard when modeling our current energy situation. This occurs because, until recently, we did not understand that the self-organizing properties of inanimate systems were as important as they are. Also, modeling of the economy as a closed system, rather than an open system, makes modeling much easier. The problem is that closed system modeling doesn’t really tell the right story. For a discussion of some of the issues associated with this mis-modeling, see the recent academic paper, Is the increased use of biofuels the road to sustainability? Consequences of the methodological approach.

This entry was posted in Financial Implications and tagged , , , by Gail Tverberg. Bookmark the permalink.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.

2,573 thoughts on “Oops! The economy is like a self-driving car

    • According to best estimates there’s around 10% of conventional oil left to discover, which would include a giant oil field or two like this one. That it was found in a remote location like the North Slope indicates that it could very well be the last such “big” field left to find, before the end of financialisation brings the oil industry and business as usual crashing down.

      If it ever makes it into production at 120k bs p/d by 2021, as forecast, the oil will just add to the sum total of the oil overproduction that’s symptomatic of the so called oil-glut. But the avenues for storage are narrowing and unless everybody suddenly can afford to burn a LOT more oil at substantial discount, and at production rates that are capped, to draw down the surplus, which is about as likely as a week with two Tuesday’s in my opinion, then I’m not sure we will get that far.

      • So that 10% does not translate into decades of BAU in your opinion? Finding oil now which is 5 years away from production, may not ever make it to market !

        • No, because the end customer is without the means to afford more which in turn burns more oil. Hence the money printing, etc to mask that fact.

        • If Gail is right (which I suspect she is) then the current “oil-glut” is not really a glut, but an oversupply of expensive oil that economies of the world can no longer afford. If that is the case then, we are facing a massive problem. It means we are out of zone where oil is both profitable to producers and affordable enough to grow the economy. If that is true then financial collapse cannot be far off.

    • http://www.investopedia.com/news/alaska-oil-find-small-historical-standards/
      Alaska Oil Find Small by Historical Standards | Investopedia: “Some leading oil industry observers such as IHS Markit and Rystad Energy are seeing the early warning signs of declining global oil reserves. IHS recently updated a report published last year that warns conventional oil and gas discoveries outside North America are at their lowest levels since 1952. According to IHS, 2016 marked another low, with just 8.2 billion barrels of oil equivalent discovered. Barrels of oil equivalent (boe) are a blended calculation of oil and gas measured in barrels. Rystad Energy was even more pessimistic, reporting that global oil and gas discoveries are at a 70-year low, with just 6 billion boe discovered in 2016.”

    • Harrah! The United States consumed about 7 Billion barrels of oil…So this find might last Joe Six Pack a couple of months…

  1. Baker Hughes: US Oil Rig Count Rises To Most Since Sept. 2015
    http://www.rigzone.com/news/oil_gas/a/148814/Baker_Hughes_US_Oil_Rig_Count_Rises_To_Most_Since_Sept_2015?utm_source=DailyNewsletter&utm_medium=email&utm_term=2017-03-10&utm_content=&utm_campaign=industry_headlines_3

    U.S. drillers added oil rigs for an eighth week in a row to the most since September 2015, extending a ten-month recovery as energy companies boost spending to take advantage of a recovery in crude prices since OPEC agreed to cut production late last year.

    Drillers added eight oil rigs in the week to March 10, bringing the total count up to 617, versus 386 rigs a year ago, energy services firm Baker Hughes Inc said on Friday…..

    The move comes as Exxon Mobil Corp., Pioneer Natural Resources Co. and others have ramped up operations in the Permian, one of the cheapest places to pump oil in the United States.

    Additionally, U.S. shale oil producers said this week at the CERAWeek conference in Houston they are plotting ambitious production growth outside the red-hot Permian, where about two-thirds of the rigs have been added over the past 10 months.

    Drillers like Hess Corp., Chesapeake Energy Corp., Continental Resources Inc and others said at the conference they were planning to expand in North Dakota, Oklahoma and other shale regions.

    Oil production in North Dakota rose 38,000 barrels per day (bpd) to 980,000 bpd in January, monthly data from the state Industrial Commission showed this week.

    U.S. crude inventories hit a record high last week, after nine straight weeks of builds, while production was projected to rise from 8.9 million bpd in 2016 to 9.2 million bpd in 2017 and a record high of 9.6 million bpd in 2018, according to federal energy data.

    Senior Saudi energy officials, however, told top independent U.S. oil firms in a closed-door meeting this week that they should not assume OPEC would extend output curbs to offset rising production from U.S. shale fields, two industry sources told Reuters.

    Saudi Arabia’s energy minister also said at CERAWeek that there would be no “free rides” for U.S. shale producers benefiting from the upturn.

    • Growth in oil rig count stalled in key LTO plays.

      US oil rig count is up 8 units, but 6 of them are in conventional basins.

      Permian: +1
      Bakken: unchanged
      Eagle Ford: -1
      Cana Woodford: -1

      Only Niobrara added 4 rigs, but oil rig count there only returned to January levels after having declined in the past 2 months.

    • “Baker Hughes: US Oil Rig Count Rises To Most Since Sept. 2015? – Amazing how that correlates with oil prices that have been slowly rising and flirting with $50 since June of last year. When the price drops again (as it already is) then oil rig count will go back down again. This cycle has been going on for years. This is not news.

  2. Oil, Gas CEOs Optimistic about Future of E&P in North America
    http://www.rigzone.com/news/article.asp?hpf=1&a_id=148812&utm_source=DailyNewsletter&utm_medium=email&utm_term=2017-03-10&utm_content=&utm_campaign=feature_1

    Three industry executives – Continental Resources, Inc. CEO Harold Hamm, Range Resources Corporation’s CEO Jeff Ventura and Anadarko Petroleum Corporation’s CEO Al Walker – convened during the conference to discuss the future of E&P activity in North America – and what their respective companies are doing to prepare for it.

    Global demand for natural gas is expected to surge in the future, but Ventura believes the United States may have trouble meeting the production requirements.

    “Certain oil and gas plays are better than others,” said Ventura, whose company devoted the majority of its 2016 capital budget toward acreage in the Marcellus. “A misconception within the Marcellus and other plays is that all acreage is created equal.”

    The reality is there are core areas and sweet spots. Typically, the core area of the play is only 5 to 20 percent of the total area the play covers, meaning 80 to 95 percent of most plays are not core, he said.

    “According to IHS, a play-by-play review suggests all of the plays will face sweet spot exhaustion within 10 years except for the Permian and the Marcellus – which most likely means production from these plays could slow significantly prior to that,” Ventura said.

    With limited core acreage, a lot of non-core drilling will be required in order to meet demand.

    “The current futures price of roughly $3 for natural gas is too low and a higher price will be required to incentivize drilling in non-core areas,” Ventura said. “The good news is that on an energy equivalent basis, $3 gas is equivalent to $18 per barrel oil, so there’s ample room for the price to increase without impairing its cost effectiveness.”

    Technology will play an important role in execution of the anticipated E&P activity in the United States.

    “It’s been tremendous what has happened with technology,” Hamm said. “We’re not predicting that we’ll see increases this year in the overall cost portion because we tend to offset any cost increases with additional technology efficiencies.”

    Walker said with a pro-business administration, he’s positive about the outcomes in terms of what it means for the potential of energy independence in North America.

    Regulatory woes were also an issue for many oil and gas leaders who felt overregulation kept the industry from moving forward.

    Hamm said Trump saw the energy renaissance as a driver of the American economy.

    • From your article:
      “The good news is that on an energy equivalent basis, $3 gas is equivalent to $18 per barrel oil, so there’s ample room for the price to increase without impairing its cost effectiveness.”
      Up in the north heat is good, today 17F. Like the $18 equivalent, that’s cheap energy!

    • Sorry you mutt! Have you ever heard of people talking up their own book?

    • “Oil, Gas CEOs Optimistic about Future of E&P in North America” – So, were the CEO’s of Lehmann brothers before is collapsed.

  3. I expect the glut will be over by mid 2017, but if OPEC increases output at that point it might last a bit longer.

    I am very doubtful of claims by the IEA that US LTO output will increase significantly near $60/b, it might increase a bit due to increased completion rates in the Permian and Eagle Ford, but continued decline in the Bakken may offset some of this increase.

    The LTO oil companies will continue to lose money, at some point these companies become bankrupt, they have lasted much longer than I would have thought in Jan 2015. I do not think losing money year after year is a viable business model, but as long as investors are willing to part with their money, it will continue

    Dennis

    Everyone likes the color red

  4. Small relocation business growing, things looking up. Prepper getaway business, profit motivation lives on……

    http://www.zerohedge.com/news/2017-03-10/preppers-stuck-cities-elite-chartering-getaway-boats-case-manhattan-emergency

    “For Long Island, where millions of New Yorkers live, it would be 20-29 hours to get off the island…….

    That’s why those with means, and forethought, are now chartering emergency charters to get out of the city – probably a good idea, especially if the helicopter is out of your price range.

    You have to drive this boat yourself …. service costs an annual fee of $90,000 and is catered toward wealthy individuals and corporations who don’t have time to mastermind their own escape.”

        • Forever is a long time, so we are good for a while then, to think time is not on our side how foolish.

    • ‘The prime minister was also given an award for his efforts to balance environmental protection with energy production. ‘

      Now that is funny!!!

      • This moron probably does not even realize what an oxymoron that is….

      • Fast-
        The Dear Leader is such a smooth talking fraud it makes anyone with two brain cells want to puke. He is the kind of guy you just wish would take a swing at you at a bar.

        Another smooth talking Obunghole type. The most dangerous of all types of politician. Those boys who gave him the award know exactly how great a spokesman he is for their interests. He will keep the protesters away.

        “You cannot make a choice anymore on what’s good for the environment, and what’s good for the economy,” How’s that for BS boilerplate?

  5. You know I can’t begin to imagine what Trump is going to say to the country and world when his vision of a Great America doesn’t come to fruition. At some point lies catches up with us all. So imagine in year four ‘Ah, sorry I didn’t know there wasn’t or isn’t enough oil to run our economy lol.’

    • Obama made up for being a lame duck in his fourth term by issuing a record number of presidential pardons. Trump will probably try to do something similar with the presidential powers he has.

      • We will get a cosmopolitan idealist* , someone committed to increasing complexity , and the economy will crash again.

        *Part of the The “lets spend more money on everything because we have plenty to go around, only our prejudices are preventing stuff from being more fairly distributed brigade so let’s just cut the checks, already”

      • Norman
        The economy is already a dead man walking, imo. Is there really an alternative you would propose at this point that could help?

        • I agree, the economy is in bad shape. Retail store closures are accelerating. This will put more downward pressure on oil prices as demand continues to wane.

  6. Things aren’t looking good for climate change either:

    William P Hall (PhD)

    President, Kororoit Institute

    Evolutionary Biology of Species and Organisms

    Draft – 08-03-2017 University of Melbourne.

    Despite what KM says GM is not so alone afterall! 😮 Why am I not surprised? ::)

    My conclusion from what appears to be undeniable evidence is that we have already passed the tipping point where we had any hope of stopping warming at 2 or even 3 °C, and urgently need to focus on greatly improving our scientific understanding, and learning how to live with and survive decades of rapid heating, and to develop global geoengineering tools to actively remove greenhouse gases from the atmosphere before most life on the planet (including ourselves) is exterminated from heat stroke and starvation in collapsing ecosystems.

    http://www.orgs-evolution-knowledge.net/Index/Essays/ClimateEmergency/Start%20of%20Runaway%20Warming.html

    A very comprehensive paper!

    Dr Hall is an evolutionary biologist by training (PhD Harvard, 1973) with completed research in comparative cytogenetics, systematics, speciation, and biogeography of North American lizards. He has significant teaching experience at Southern Illinois University, Edwardsville; Harvard University Extension; the University of Puerto Rico, Rio Piedras and the University of Colorado, Boulder in many areas of biology including vertebrate and invertebrate biology, marine biology, genetics (molecular and classical), evolutionary biology, biogeography. He was a University of Melbourne Research Fellow in Genetics from July 1977 through August 1979, and went back to the USA to teach for a year at University of Maryland, College Park.

    Commenter says:

    Re: IS THIS THE START OF RUNAWAY GLOBAL WARMING?

    Isn’t saying that something is “runaway” mean there is nothing stopping it?

    If so, perhaps the author’s last sentence should be changed to:

    My conclusion from what appears to be undeniable evidence is that we have already passed the tipping point where we had any hope of stopping warming at 2 or even 3 °C, and urgently need to focus on transitioning in a humane way most life on the planet (including ourselves) before natural processes take over and they are exterminated from heat stroke and starvation in collapsing ecosystems.

    • Yes, unfortunately there are positive feedback loops involved. Warmer air can hold more water vapor (also a greenhouse gas) which leads to warmer temperatures and so on until a new equilibrium is reached. Wow, young folks have no clue what is coming there way, either collapse or runaway global warming. Pick your poison. I think 1945, what a great year to be born! (Not me though, I’m only 40.

      • There are a number of limits to growth we are facing. The odds of any single one collapsing our system is small. But, together all these looming (and growing number of) threats have the potential to cause catastrophic damage to our current way of life on planet Earth.

    • Seems to have the opposite effect on me (knowing time is limited) for whatever reason, I guess because I haven’t reached certain important goals. When I run out of my supply of klonopin I am royally screwed. I’ve always had a nervous disposition.

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