Not so much: Shale gas shows its limitations

If you live in the United States and bother to turn on your television, it's almost impossible to avoid ads telling you that natural gas from shale is both abundant and environmentally safe to develop. In these ads, so many happy people seem to enjoy burning natural gas that it would be difficult to imagine that their smiles might come to a premature end.

Though the ads will probably not be withdrawn or recut, the emerging facts run counter to the gleeful tone of this television commercial produced by America's Natural Gas Alliance, a consortium of shale gas drillers. (For some more samples from other advertisers, click here, here and here.) First, it has become increasingly apparent from actual well data that shale gas is not being harvested according to the much-touted "manufacturing model." This model assumes that shale deposits are basically uniform, or at least uniform enough that a driller could sink a well virtually anywhere in a shale gas deposit and have an economical well blasting out methane.

Independent petroleum geologist Art Berman and his colleague Lynn Pittinger, who studied the actual data, have shown that the manufacturing model is a myth, to wit: "The contraction of extensive geographic play regions into relatively small core areas greatly reduces the commercially recoverable reserves of the plays that we have studied." In short, you can't just drill anywhere. Drillers thought the huge plays highlighted in pink on the map below would yield profitable shale gas everywhere. It turns out that there are sweet spots, and then there are spots that are not sweet at all. And, the sweet spots are turning out to be quite small compared to the size of the deposits.

Berman and Pittinger also point out that initial high flow rates give out within a couple of years, putting drillers on a treadmill merely to replace this declining production and implying geometric increases in the number of wells they must drill to grow production consistently. What's more, the two authors question claims of decades-long flows, albeit at very low rates, from individual wells. The history of shale gas wells to date suggests that this is unlikely at best, and almost certainly uneconomical.

The second shoe to drop was a piece in The New York Times entitled "Insiders Sound an Alarm Amid a Natural Gas Rush" which cited internal memos and emails from industry and government officials admitting that estimates of the available gas from shale are overblown.

The third piece of damning news came from a recent U.S. Geological Survey (USGS) assessment of the Marcellus Shale natural gas deposits, by far the largest of their kind in the United States spanning vast areas of New York, Pennsylvania, and West Virginia as well as sections of Ohio, Kentucky and Tennessee. Previously, the U.S. Energy Information Administration, the statistical arm of the U.S. Department of Energy, had estimated that the Marcellus Shale contained 410 trillion cubic feet of so-called "technically recoverable shale gas resources." (This says nothing about whether such resources can be economically recovered. See the discussion of natural gas prices below.) The USGS report put the technically recoverable amount at 84 trillion cubic feet, an 80 percent reduction. For reference, the United States consumed about 24 trillion cubic feet of natural gas in 2010.

The often repeated claim that the United States has 100 years of natural gas at current rates of consumption is based to a considerable degree on the 410 trillion cubic feet which the Marcellus Shale supposedly added to U.S. resources. But, don't expect the shale gas drillers to stop advertising the 100 year claim anytime soon.

The fourth piece of news came not from industry insiders or studies of Mother Nature herself, but from state government. As I wrote earlier this year, new regulations could significantly dampen shale gas production. The newly released regulations in New York state do just that and to a degree that even I didn't think possible. Buffers are now required around water resources and have cut down the area available for drilling within existing shale gas leases by 40 and 60 percent. In addition, some municipalities are using their land use regulatory powers to make it all but impossible to drill in their jurisdictions.

As a result drillers are furious, so furious that some are thinking of abandoning their leases to concentrate on drilling in states with more lax regulations. New York may bid them a fond farewell since the legacy costs of cleaning up aquifers and drinking water could in the long run far outweigh the temporary economic gains from natural gas production.

Finally, there is always the question of price. A drilling foreman I know told me not too long ago that we might have quite a bit of natural gas available above $10 per thousand cubic feet, but not very much below $4. Price matters because the huge amount of natural gas promised by the industry would require the exploitation of deposits that are expensive to develop and therefore require prices much higher than today's.

I expect there to be a fifth, sixth and seventh piece of news and so on, detailing new limits on the rate of shale gas extraction. True, the explosive growth of shale gas production certainly caught many energy analysts by surprise. The received wisdom up until recently was that conventional gas production would decline, and the United States would increasingly rely on imports. But, I think the public and policymakers, who are being propagandized daily by the industry, may be in for yet another surprise.

Abundant natural gas? Sort of, but only if the price is right. Cheap natural gas for the long run? Not so much.

Don't gamble with the grocery money

My grandfather loved to gamble. So, it is no surprise that my father likes to gamble. I confess that even I enjoy the occasional challenge of facing an opponent when both us have a little skin in the game. But my grandfather--who didn't always follow his own advice--gave my father some advice which he has taken seriously and passed on to me, to wit: Don't gamble with the grocery money.

It sounds simple enough. But the real trick is to figure out whether you are gambling with the grocery money. I began thinking about all this as I was seated next to a woman retiree on a train ride during a recent trip. We got to talking about the Occupy Wall Street protest, and we went on from there to talk about the stock market and retirement savings. I suggested to her that the retirement savings of the entire middle class of America are at grave risk. I explained that the seeds of that risk were sown back in the early 1980s when a then little-known provision of the tax code labeled 401k--which was designed to encourage supplementary retirement savings--was used to transfer all the risk of pensions from companies to employees.

Before the 401k craze (403b for nonprofits) companies with pension plans generally guaranteed a specific benefit, i.e., an amount per month that would be paid to retirees for life based on years of service, pay level and sometimes other factors. It was up to the company to figure out how to make that happen with money set aside usually through both employer and employee contributions. The company often hired outside money managers to invest the money based on the projected needs of retirees. Such plans are usually referred to as defined benefit plans, and they were the norm before the 401k. Now, they are rare.

The result has been that every person with a 401k has had to become an amateur investor. And, all seemed well from the early 1980s onward when such plans first came into widespread use. The world had just embarked on what would turn out to be the biggest bull market in stocks ever seen. As John Kenneth Galbraith once said, "Financial genius is a rising stock market." It became common wisdom that everyone should own "stocks for the long run." We were told we were in a "new era" of unprecedented technological progress. We were also told that monetary authorities had now mastered the business cycle through their clever manipulation of interest rates and other levers of finance.

(It is puzzling why anyone would continue to assign omniscience and omnipotence to central banks and governments after the Bear Stearns collapse, the 2008 crash, phase one of the European debt crisis last year, and now phase two of the European debt crisis. If central banks and governments are so powerful and all-knowing, shouldn't they have been able to prevent these serial financial implosions?)

Back to the poor woman sitting next to me on the train. I suggested that faith in the narrative described above was borne of a highly unusual period of history, and that one has only to go back to The Great Depression to find that it is possible for the stock market to decline 80 percent and not recover to its old highs for two and half decades. (I forgot to mention that today Japan's stock market is down more than 75 percent from the high it reached in 1989!) I suggested that the current system of retirement finance was largely concocted to relieve corporations and other institutions of their retirement obligations to employees and to enrich Wall Street. Wall Street, after all, gets its fees whether the client makes money or not.

I proffered that the game was a dangerous one for all but the largest players. Why? Three reasons: First, those players have access to information, connections and great gobs of capital that can move markets, and they are perfectly capable of making money when markets go down as well as up. Second, they have so much money that even severe losses will not prevent them from buying groceries and paying their mortgages and utility bills. Third, the government will step in to prevent them from going bust if it believes this means preventing a systemwide financial meltdown.

Were average people like her really in a position to compete with that? I asked. I thought to myself that this woman and so many like her are not playing with money they can afford to lose. They are gambling with the grocery money and they don't even know it! And, that's because they've been sold the idea that they are investing which sounds a lot nicer than gambling. But it amounts to the same thing.

Of course, if everyone took my advice tomorrow, the stock market would collapse. But my argument is that we should have never have gotten to this point. We should never have abandoned a system that makes retirees essentially indifferent to the level of the stock market. But because of the move to 401ks, many are now risking losing their grocery money and do not seem to know it.

Perhaps my fears are unfounded. But as I look at the amount of gray hair in the crowds at various Occupy Wall Street events, I wonder if a lot of damage hasn't already been done. The last 10 years have netted the average investor essentially nothing. And, the most recent market swoon has once again tested hopes that the casino profits in the market can continue.

With the Europeans outdoing the Keystone Cops as they slide toward an ineluctable default in Greece and a possible worldwide contagion; with a worldwide economic slowdown and possibly a recession already underway; with rumors arising nearly every day that one bank or another may soon go down; and with a severe property bust already evident in China, I fear there is worse to come.

Can Margaret Atwood's environmental message reach a broad public?

Okay. So you want to reach the broad public about the multiple, intertwining, galloping climate, resource, and environmental disasters facing every living creature on Earth. Do you write up a detailed, compact analysis of the problem and make it available on the Internet? Should you put it all into a documentary film to make it more accessible? Maybe you should write a companion book as well for the few remaining readers willing to pay for an actual physical copy of something.

All of that has been done, of course. And, it would be unfair to say that it has had no effect. There is now a markedly larger group of people in the world who are conversant about all the major climate, resource and environmental problems we face. There are even many more politicians and policymakers who've been educated in this way. But instead of the swift, decisive action one might expect to address these onrushing catastrophes-in-the-making, the response--when there has been any at all--has been rather tepid.

One reason is that politicians by their very nature are inclined to do only what the public will let them do. (Naturally, they'll often do things which are not in the interest of the broad public if that public is unaware of what the politicians are doing.) But when it comes to complex, knotty issues such as climate change and peak oil, there is no wealthy constituency which can arrange midnight deals out of view of public scrutiny. That means there must be public pressure intense enough to motivate politicians to act. It has to be so intense that they think they might lose an election over such issues.

Perhaps there is another avenue of public persuasion that is up to this task. We need a compelling narrative, I often hear. So true. But what makes a narrative compelling? Certainly, it must be simple enough to be understood by a broad group of people. Check. And, it must play on values that people already hold dear. Check. Finally, it must be in a form that is readily acceptable and easily obtained by the target audience. Check.

Now, the problem, of course, in that a compelling narrative about our climate, resource and environmental challenges would be hard to make simple. The whole point would be to make it clear that these are complex problems with no easy solutions. And, the whole point would be make it clear that these problems arise from the totality of the way we live, making it difficult to appeal to existing values. And, the whole point would be to startle people into a mode of awareness that goes beyond their current way of seeing.

In The Year of the Flood Margaret Atwood attempts such a narrative in an almost fairytale fashion. The clever thing about the novel is that it appears to be a typical post-apocalyptic story, taking us to an indeterminate locale in the future in which two young female characters find themselves caught in the great "waterless" flood, a plague that is devastating the population. But we quickly move back in time. We follow these characters as they work and wander in this pre-plague futuristic world, one that seems dysfunctional and violent in ways that are familiar to us today. So far, it's pretty standard science fiction stuff.

But then the two women end up joining the friendly Gardeners' cult whose members are so gentle and wise that one is lulled into thinking that Fred Rogers might suddenly appear at the edge of their rooftop garden, eager to take his television viewers on a tour. The impression that some of the Gardeners might have been descended from the Amish seems well-founded. How quaint they are in this world of advanced genetic technology.

Gradually readers are pulled into a sinister world controlled by private security firms which now run the police force and the prisons and which also guard corporation employees who live in isolated compounds. The corporations have become ascendant and their technological vision of the world knows no constraints. This is because a badly run authoritarian, corporation-dominated state has replaced all other civil authority. Everyone must have a state-sanctioned identity, and deviations from the corporate line, i.e., all technology is good for us and corporate control brings prosperity and health, can mean loss of a job and even prison time.

The science fiction fantasy elements of the story actually comport well with the expectations of modern readers. So, in this respect Atwood has managed to overcome possible resistance to her narrative. The religious views of the Gardeners' cult are summarized in occasional addresses by the leader of the group, Adam One. (Only in a society completely hooked on genetically engineered food would people who grow food in a garden be considered a cult.) The religious discussion makes it possible in some ways to bypass the modern industrial mind and reinitiate contact with the natural world using religious metaphors from agriculture and nature. And, this makes it possible to explore values that readers might harbor apart from the industrial corporate world.

For all these reasons I believe Atwood has produced a master work of environmental awareness. This novel, which appears to be merely the fantasy of a talented Canadian author is, in fact, meticulously researched. Its references to genetic engineering are not merely fanciful but anchored in actual ongoing scientific work. The story exaggerates for effect, of course. But its dissection of the food system (one main character works briefly for a fast food chain called SecretBurgers) is clearly drawn from a keen understanding of our current system. The privatization of every public function seems overblown, but suggests the logical extreme of our current trajectory.

A well-designed narrative enters the mind at both the conscious and unconscious levels. I am reminded of the film Avatar which, though a piece of science fiction, is essentially a story about the displacement of indigenous people by a ruthless corporation to enable the mining of a valuable mineral. Right-wing pundits decried the film as an attack on American foreign policy which they said has historically helped to spread democracy and prosperity. No matter. Moviegoers liked the film as much in Alabama and Mississippi as they did in California and New York. Whether the film changed mindsets is unknowable. But it had no trouble gaining acceptance.

Atwood's novel is not a movie, not yet anyway. And, so even its well-founded success will still result in only limited influence. After all, one must buy it. For most people that will cost quite a bit more than a movie ticket. And, then one must devote many hours to reading its 400 plus pages. But The Year of the Flood does offer an interesting blueprint for the successful environmental/resource/climate-change story. And, for that reason it would behoove all those who are searching for ways to reach the broader public about these important issues to read this remarkable work.

Destroying dreams the peak oil way

It is with some trepidation that I prepare for a trip that includes an appearance before college students who generally find the idea of peak oil so disturbing that they do not want to even hear about it. And, I can't blame them. They must think that I have come to destroy their dreams, dreams premised on a future of ever expanding material prosperity and career advancement.

Certainly, a persistent, irreversible decline in world oil production would reshape nearly every facet of our lives. I like to think that we don't need to give up on our dreams, just choose different ones that are achievable in the challenging environment we are likely to encounter as the coming decades unfold. And, I like to think that those dreams can be as much, if not more, satisfying than our current ones.

That's cold comfort to those whose entire education is designed to prepare them for exceedingly narrow occupational niches, niches which they've been told will bring them wealth and security. It is an unfortunate truth that in a world climbing down from unsustainable complexity (fostered by previously cheap energy supplies), many of those niches will disappear.

I've come to understand that most people cannot imagine a future that is different from the recent past--and by that I mean the past few decades. And, this tells me that until the past few decades are a fading memory, most people will find imagining an entirely different future an insuperable task. Even as conditions worsen, they will assume that if governments will just take the right steps, then the world will return to its former path of exponential growth and unlimited opportunity. They will assume this because opposition parties will tell them so just to get elected.

As the world's financial markets gyrate wildly, I find myself in conversations that touch on investing with both family and friends. With family members I am much more forthright about how I perceive the risks we face. I know that my family members will forgive my brash interventions into their lives and that, in any case, they are all strong enough to ignore me and think for themselves. But with friends I am reluctant to speak about such matters and only discuss them when others introduce the topic. If I am asked for my opinion, I currently urge extreme caution. (Full disclosure: I exercise exactly two levels of care in investing: caution and extreme caution.)

The response more often than not is that, while stocks are down, they always go back up, and so naturally, it's not smart to sell your stocks when they're down. This sounds suspiciously like the person who is losing at roulette and sticks around in hopes of winning her money back. It's hard to counter people's recent experience, i.e., the last three decades which delivered the greatest bull market of all time in stocks. And, it's even harder to convince them that history is replete with examples of stocks falling to a rather small fraction of their highs under conditions very similar to those which prevail today. Japan--whose market is down more than 75 percent since 1989--comes to mind.

But I now realize that there is a dynamic here similar to that which I experience with college students. Middle-aged people with retirement savings have dreams, too. And, my suggestion to exercise extreme caution, i.e., get out of the stock market and into cash, is tantamount to telling them that they cannot have their dreams. So many who have saved for retirement by investing in the casino called the stock market believe that said stock market will provide the money to pay for dreams their regular salaries could never have financed.

This dynamic, unfortunately, is yet another roadblock hindering people from taking steps to salvage what future they can. Would-be destroyers of dreams, beware! You will have the ear of fewer and fewer people over time as many tune you out in order to preserve the image of the future they have in mind.

Of course, I could be wrong in my views and miss out on participating in and getting rich from a great economic boom ahead that will inevitably come after our leaders clear away the few small hindrances that remain. But then I'm not sure I really want what that path has to offer, even if it turns out to be available. In that sense, I'm covered for both positive and negative outcomes since our present arrangements, economic, social, political and occupational, seem less and less alluring with each passing day. Maybe that's the key to giving up on the dreams we've been taught to dream and dreaming something altogether new.

Crisscrossing the Rubicon of peak oil

In the minds of many of those concerned about an imminent rendezvous with peak oil, the day the world slides past the all-time peak in oil production will be a fateful and irreversible crossing. After it all the calamitous predicted consequences of the ensuing decline will become obvious--financial collapse, unaffordable energy prices, shortages of food and other goods dependent on cheap oil, and mounting unemployment to name a few. And, the cause of these effects will be plain for everyone to see.

But even as some of these symptoms begin to manifest themselves, the public remains ignorant that stringency in oil supplies lies at the heart of them (though peak oil is admittedly part of a complex web of problems related to our broader energy and resource use). Why is this so?

From the long view the level of oil production on a graph in this decade may well look like a peak. But from closer in, as we experience it day to day, month to month, and year to year, production may seem to be on a long, bumpy plateau. Even though one of the world's major sources of energy information, the International Energy Agency, admits that conventional crude oil probably peaked in 2006, the public and most policymakers remain ignorant of this sign that liquid fuels will have a hard time keeping up with demand.

It is true that other liquids--natural gas liquids, biofuels and unconventional oil derivatives--have allowed total liquid fuels production to eek out at new all-time high this year. But robust demand once again drove the price for Brent crude above $100 where it remains as of this writing. This seems to have had the effect of dampening economic activity and so prices and production have actually fallen from their highest levels as demand has waned. We know that oil price spikes have been associated with 10 of the last 11 economic recessions (PDF); there is reason to believe that we are headed into number 12.

It is this pattern which prevents a clear signal to people, policymakers and markets about our predicament. We seemed to be crossing the Rubicon of peak oil in 2008 as prices rose to $147 a barrel only to cross back during the subsequent two and a half years leading to a new nominal peak in production in January this year. In between the price of oil plummeted to around $35 a barrel before rebounding above $100.

This phenomenon has now been described for us by the former editor of Petroleum Review, Chris Skrebowski, in his piece "A Brief Economic Explanation of Peak Oil." Skrebowski believes there is a sort of speed limit that oil prices are imposing on the economy, and it begins roughly when oil trades above $90 a barrel though the number may be higher for high-growth countries such as China, perhaps up to $110. If prices stay in this area for long, it appears to signal that a recession is not far away.

From the public's point of view, oil prices this high have become a "normal" part of life. And, if Skrebowski's analysis proves correct, there will be no dramatic price spikes above, say, $200 a barrel that stick, something that might definitively signal the beginning of a long-term oil crisis in the public's mind. Instead, there will be repeated attempts to revive economic activity through fiscal and monetary stimulus which will ultimately fail to gain traction as oil prices shoot up once again, dampen economic activity and lead to recession after recession. During each recession oil prices will drop making the peak oil problem seem to disappear.

It's certainly true that significant increases in world production of liquid fuels would end this cycle. But as Skrebowski points out, "If adaptive responses were fast enough and large enough, oil prices might be broadly stable. They clearly are not." By "adaptive responses" he means in part those increases in oil production and the production of substitutes. But, the unstable economic climate we are now facing is making long-term planning and investment in both the oil industry and the alternative energy industries difficult.

What Skrebowski offers is a sound rejoinder to those economists who say that peak oil theorists don't take into account economic factors--factors which those economists say will solve the problem of peak oil whenever it arrives by destroying demand and making substitutes profitable. For now, however, we can see that the economic factors are not really solving the problem of peak oil, but possibly feeding it. That's not something most economists will be able to hear. And, it describes a pattern that will likely only confuse the public and policymakers even though Skrebowski has explained it in terms that any thoughtful person can understand--if only they want to.