Chill to Fight Climate Change

There’s something you can do today to fight climate change. It’s effective, it’s easy, it costs nothing, it doesn’t require a lifestyle change, and most of you are going to hate it. You are also going to hate me for bringing it up because there is no rational reason not to do it. It is literally a crime not to. Literally.

 Stop speeding. Drive the speed limit. That’s it.

 Here’s the math. (If you don’t like explanations, speeding in the U.S. is responsible for at least 4.2% of our oil use, 1% of world oil use and 15,000 deaths annually)

 At highway speeds, most of your energy goes to pushing air out of the way.  Air drag increases by the square of your speed. Double the speed means four times the drag.  A small increase in speed ends up making a lot of difference in energy use.

 Compared to driving at 65 miles per hour, driving 75 mph will cost you 15% of your gas mileage and driving 80 mph will cost you 20%.

It’s hard to get an exact number on what percentage of drivers speed, and by how much. Study results vary. Generally speaking, about 75% of drivers speed, and about 80% of drivers surveyed think that driving ten to twenty miles per hour over the speed limit is fine. Absolute speed limit compliance is low. Biased self-reporting undoubtedly minimizes the problem.  It would be safe to say that 75% of drivers are losing about 15% of their mileage by speeding.

Road transportation accounts for 40% of our oil demand. Multiply it all out and about 4.5% of U.S. oil use is just due to speeding. The U.S. accounts for 20% of world oil demand, so speeding Americans increase world oil demand by about 1%.

Just an aggressive driving style, minus speeding, can cost drivers another 25%, so slowing down *and* calming down behind the wheel could cut world oil consumption by 2%.

We’d still have the other 98% of oil-based emissions to deal with, but it is free, it is easy, and it’s the law. When I say it’s the least we can do, I mean it’s the very least we can do.

If contributing to the survival of the planet isn’t enough to motivate you, consider the more direct deaths. According to the National Highway Traffic Safety Administration, speeding was a contributing factor in 9,478 deaths in 2019. An MIT study found that air pollution from vehicles causes 53,000 deaths annually. The inefficiency of speeding causes about 10.5% of those, or 5,565. If everybody slowed down, 15,000 Americans would not have to die prematurely. One of them could be you, or someone you love.

Cruise control is your friend, and a friend to nature. Set it at the speed limit. Cease worrying about speed traps. It’s really, really the very least you can do.

There Will Be Math: Fracked Oil

I saw the following chart in an issue of Peak Oil Review, a publication about the oil industry.

 

Note the numbers on “U.S. light tight oil.” This is what we would call fracked oil, that is, oil from one of the shale deposits in the U.S. What distinguishes these deposits is the difficulty of extracting oil from them. They have low permeability; the gaps in the shale are small and not well connected, so there isn’t much oil per cubic meter and that oil has a tough time moving through the rock. Just for comparison, sandstone oil deposits in Saudi Arabia have a permeability of about 5 Darcies. (A Darcy being an oil industry specific unit of permeability and perhaps 19^th century English hunkiness) An American shale deposit might have a permeability of 5 milliDarcies, one-thousandth as much.

The answers to these problems are horizontal drilling (“bottle brush” wells) and hydrofracturing, the injection of high pressure fluid to crack open the shale. These are expensive processes.

Note that in the chart the capital costs are per peak daily barrel, not the average. Because of the nature of a fracked well, the output tends to be extremely high at first, but tapering off quickly. A fracked well might produce most of its total output in the first few years of production. In contrast, a conventional oil field in the Middle East might slowly develop to peak production and last decades. Note the relatively low capital and production costs for Iraq and Saudi Arabia.

Elsewhere, on an investment site called Seeking Alpha I found a graph of projected and actual production from a particular well drilled in the Bakken shale formation in eastern Montana and western North Dakota.

 

Looking at these numbers it strikes me that the pessimism I hear about the economic viability of these shale formations is well founded. I’ll apply the numbers from one to the other to get a general idea of the economics. Right now crude oil is around $57/barrel. Subtract the $8/barrel for production costs and the oil producer will have $49/bbl to work with.

The well in question peaks at about 475 barrels per day. By the EIA chart, a 475 bpd well costs between $28 million and $42.75 million to drill. The average over six years is about 1/3 of peak, so drilling costs $180,000 to $270,000 per average daily production.

At $49/bbl, $180k/$49 = 3673 days to breakeven, or about 10 years. The higher number, $270k, gives a breakeven point of 15 years. Add interest payments to that.

Right now those millions are coming in the form of junk bonds and venture capital. The bonds pay around 5-7% interest. The investors want higher returns, but I’ll be optimistic and assume 5%. At the low end that starts off with interest payments of $1.4 million/year, which is $3835/day or 78 barrels breakeven at $49/bbl.

Eyeballing at the production graph, the first 3 years average 150 bpd so the well makes $2.68 million/year, netting about $1.3 million/year. Problem: If the loan period is ten years, then annual interest and principal would total $3.64 million. This well could make that in the first year, but not the second.

Note that the producers re-fracked the well when it dropped below 100 bbl/day. Re-fracking costs about $2 million and brings it back to 100-200 bbl/day range for a couple of years. With an average over the next few years of a bit over 100 bbl/day, this adds a year to the breakeven point.

At the end of six years the flow has dropped to around 50 bbl/day. Even if the production company had somehow been making full payments all along, this is still something close to the breakeven point for just paying the interest (~$890k). There are at least five more years to go before the well makes back its initial investment.

This is all generalities, averages, and back-of-the-envelope, but even with a more optimistic scenario it doesn’t look good for the loan officer who approved this one. The operators will struggle to eke out sufficient total production and will probably hit permanently negative cash flow just two years in.

Not all sections of the various shale fields are the same. There is a concentrated area of low cost wells in a few western counties of North Dakota. These wells can make money at $40/barrel. On average, though, shale oil is a losing proposition in the mid-fifties. The average breakeven price is more like $60, and shale oil in the U.S. suffers from price discounts due to inadequate transportation infrastructure. Conoco Phillips, the largest U.S. oil exploration company, has announced that it will not pursue any opportunities with all-in production costs of over $50/barrel. That limits their options.

As recently as the summer of  2014 the WTI oil price was over $100. A combination of U.S. and OPEC overproduction killed the price. U.S. shale oil production went from 1 million barrels/day in 2007 to a peak of just over 5 million in 2015. It has dropped by a million since then, but OPEC is holding back production to keep the price in the $55-$60 range. They can crash the price again if they think wiping out U.S. shale production is in their interests. Then again, if they manage to crank the price over $60 fools will rush in and complete half done shale wells and the overproduction will drop the price again.

Witness the string of bankruptcies in the shale oil and gas sector. There were 89 last year alone. Investment has dropped off and the rate of new wells being drilled is down. Most of the major players are burning at least $500 million annually.

I know you will be shocked, shocked, by this, but it looks as if the shale oil boom was mostly a con from the beginning. It efficiently transferred cash from the pockets of investors, banks, and bondholders into the pockets of drillers and oil service companies. It was less efficient at transferring oil out of the ground for less than the market price.

Driving with Putin

Right now a lot of us are in reactive mode. Trump, Kim Jong Un, Harvey, and Assad keep throwing sand in our faces and we spend all our time trying to wipe it off and move forward. Even with all this political chaos we should pause, stop reacting for a minute, and make proposals. The persuasive power of “not that” diminishes with repetition.

U.S. intelligence services have established within a reasonable doubt that the Russians interfered in our last election. The details of the extent and Russia’s success are yet to be completely uncovered, but we know our political parties were hacked, our voting records were hacked, and our social media were clogged by a deliberate propaganda campaign. It is probable that the Trump family/campaign and the Republican Party were both involved in Russian money laundering.

This raises an important and tricky question: How do we retaliate against a nuclear armed nation that is also the world’s largest oil exporter? The answer is in the question. They are the world’s largest oil exporter. We are the world’s largest oil importer. The imbalance in this relationship seems to give them an advantage, but it is exactly the opposite. They can’t afford to export less oil. If we do it right, it is no problem for us to import less. The price of oil and the state of the Russian economy hang in the balance. A fine balance it is.

Right now the international oil cartel OPEC is trying to restrict the output of its member states in order to bring the price per barrel above $50. Last November, OPEC and its allies agreed to cut output by 1.2 million barrels per day (mbpd) as of January 2017. That compares to world production of 98 mbpd and OPEC production of 33 mbpd.

The U.S. consumes about 19.6 mbpd, and 43% of that, 8.5 mbpd, gets refined into gasoline for cars, SUVs, and light trucks.

An average car in the U.S. gets around 25 mpg. However, that mileage goes down as driving speed goes up. The U.S. Department of Energy, on its fuel efficiency page, notes, “Aggressive driving (speeding, rapid acceleration and braking) wastes gas. It can lower your gas mileage by roughly 15% to 30% at highway speeds and 10% to 40% in stop-and-go traffic.” Slowing down from 75 mph to 65 mph would raise mpg by about 10%.

And we do go 75 mph. A study by the Insurance Institute for highway safety showed that on rural interstates anywhere from 7% to 49% of drivers were going at least 75 mph.  In some places over 10% of drivers were going over 80 mph.

I’m going to make a wild ass estimate and say that if, as a nation, we just chilled out and slowed down, we could raise our overall gas mileage by 15%. Our fleet gas mileage would go from 25 mpg to 28.75 mpg. We’d use 13% less oil for gasoline production. That’s 1.1 mbpd. (See the hard won 1.2 mbpd reduction, above) That’s a nightmare for OPEC and a nightmare for Russia.

In February 2016, before the OPEC reduction agreement, the price per barrel touched $30. It could go there again without much more of a glut. That would cut Russian government revenues by 25%, their exports by 25%, and knock about 10% off their GDP. Ouchski.

Now, I’m not expecting Americans to suddenly become Prozac nation behind the wheel. I did this thought experiment to point out what a close run thing the world oil market is. Slight wobbles in supply or demand cause dramatic price swings. Even the prospect of such changes makes the commodity markets jump. It wouldn’t take a lot for us to use the power of our demand to rock the world. I mean, I’m not asking people to donate a kidney. Actually, I’ll bet some people would donate a kidney in exchange for the right to speed.

I have another idea, more pragmatic, although politically a stretch, that would do this and more. I’ll get to that one next time.

The Saudis Hold the Line

The big news in the oil world last week was a do-nothing policy by OPEC, and especially by the Saudis, the swing producer of oil. By swing producer I mean that Saudi Arabia has the physical, political and financial capacity to adjust its oil output to suit its policy goals. OPEC met this last week and decided to leave its output at 30 million barrels a day, despite the abrupt drop in world oil prices. Crude oil closed Friday at $66, down from $110 not long ago.

You’d think that the Saudis would want to cut production to tighten supply and bring the price back up. By some accounts, they can’t meet their national fiscal goals unless the price of oil is above $90 a barrel. They aren’t losing money, even at $66, as their cost of production is the lowest in the world at $3-6 a barrel. However, oil being essentially their only source of income, their national budget is in deficit at present prices.

My guess, along with some other observers, is that they are playing the long game.

The rising production of shale oil in the U.S. is a big part of the problem for the Saudis. Although temporary, our production increase has pushed down our demand for oil on the international market. It’s an expensive process, though. A shale exploration company has to drill multiple boreholes that turn horizontally and follow the thin layer of oil containing shale. Then they have to force fluid and sand into the holes in order to fracture the shale and let the oil out. This is hydrofracturing, popularly known as fracking. The nature of these wells is that they produce large amounts of oil initially and then rapidly decline, sometimes within months. Then the driller has to pack up the equipment and repeat the process elsewhere.

There are a number of oil producing shale formations in the U.S., but only a small percentage of the total shale area is highly productive. Some of the shale exploration and production industry was losing money even at higher prices. The business plan for a number of companies seemed to consist of outlasting competitors and reaping the benefits of future high prices.

The expensive production cycle and money-burning nature of the industry requires a constant influx of money, both as investment and credit. That is what the Saudis are after.

By maintaining the world supply of oil at present levels OPEC can keep the price of oil below the breakeven price for many shale oil companies. Beyond that, a lower oil price means that drillers lose access to credit. Just as the resale value of your house backs your low-interest mortgage, the estimated value of a drilling company’s oil reserves serves as security for loans. When the price of oil drops they have to resort to higher interest unsecured loans and divert present income to exploration, all of which discourages both banks and investors.

 OPEC doesn’t have to drive all of them out of business. They can pick off the stragglers, the companies most overextended and possessing the least productive oil field leases. A string of bankruptcies in the shale oil industry would not only lower production, but also choke off investment and credit. That would hamper present production and slow the return of the shale oil industry when prices recover. The threat of repeated Saudi intervention would keep banks and investors at a distance.

The Saudis are willing to spend some sovereign wealth to clear the field of competition. With currency reserves over $700 billion, they can endure $66 oil for a while longer. Much longer, I’ll bet, than the U.S. shale industry.

The Oil Ceiling

The expression “glass ceiling” is probably familiar to most of my readers. It refers to that invisible barrier of unwritten rules that prevents women and minorities from being promoted past a certain level. Being an energy wonk, I am interested in an analogous concept I’ll call the oil ceiling.

I recently read an interview on a site called Energy Bulletin with Steve Kopits. Kopits is an energy analyst with a well-respected international consulting firm. He came to the study of peak oil almost accidentally while preparing documents for an investor prospectus. The interview is well worth a few minutes, but here is a major point for me:

Question: Could you tell us about your views on the US oil price threshold for recessions?

Kopits: The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the US went into recession. Right now, 4% of GDP is $80 oil. So that’s my current view: If the oil price exceeds $80, then expect the US to fall back into recession.

Right now the price of oil is bumping along in the mid 70 dollar range, with occasional excursions into the red zone. As the economies of China and India continue to expand, expect their oil demand to increase proportionally, even as world oil production stagnates. $80 per barrel oil plus some speculative overshoot is predictable.

It seems that our economy is hitting the oil ceiling. The U.S. being such a profligate consumer of oil, sucking up 25% of the world supply, we can’t get around this barrier. The situation seems set up for an endless cycle of recession, partial recovery, a resulting run up in oil prices, and recession again.

I looked around for numbers on the Vermont economy and found that our State GDP is around 25 billion dollars. Our energy expenditures are just over a billion, much of that being oil products, and 90% of that going out of state almost instantly. That puts Vermont right at the 4% limit. Could we be bumping our heads on the oil ceiling as well?

What this tells me is that in order to avoid a perpetual sawtooth graph of economic performance we need to gear up for energy efficiency. In chemistry and economics a process is limited by the scarcest necessary element. That element will be energy. The economic winners of the future will be localities with the lowest energy inputs per unit of productivity. The most prosperous populations will be those with the lowest energy use per capita. Parallel to this, the economic winners will be the places that make the fastest and most coordinated switch to renewable energy sources.

Part of this process will be the simple, usual efficiency practices such as weatherization and industrial efficiency programs. The promotion of public transportation will be important. All this is commonplace.
 
The real differentiator, however, will be the rethinking of mobility and community itself. Some of this is in the realm of municipal, regional, and state land-use planning. People will need to work, shop, and entertain themselves near to where they live. For many people this is presently impossible. In the future it will be a necessity. This requires the rezoning of towns and cities and a coordinated long-term plan for localized economic development. It would help to strengthen our communication network so that people can telecommute – it may become the default for information workers. We will have to reverse the long-term trend of emphasis on increasing mobility in favor of a focus on access. We’ll have to stop thinking in terms of how to move ourselves to something or move that something to us. We’ll need to have what we need on a day-to-day basis close at hand.

Vermont is already one of the least energy intensive states, but we’ll need to do more. The less oil we need per capita and per dollar of GDP, the higher the price of oil (and coal and natural gas) can go before it starts to drag down our economy. If we manage this well enough, oil price at which Vermont suffers can be higher than the price at which other economies go into recession and bring the price of oil back down. I suppose it is selfish, but my thought is that an energy efficient Vermont economy could be prospering while the rest of the world bangs its head on the oil ceiling.