Sunday, May 26, 2013

Life, energy, the universe and everything

In Douglas Adams' science fiction series, The Hitchhiker's Guide to the Galaxy, a computer dubbed Deep Thought discovers the "answer to the ultimate question of life, the universe, and everything." After seven and one-half million years of computation, it spits out the answer: 42. The story goes on to explain that the answer is inscrutable because the beings who programmed Deep Thought didn't know what the ultimate question was.

That seems a fitting place to begin exploring my slightly expanded version of Adams' question, namely, the answer to the question of life, energy, the universe and everything. It is, of course, hard even to know what question is being asked. But, for me it is a question about the structure and purpose of life in the universe. Adams discusses (humorously, of course) the ultimate question in one of his later novels. Here is the Wikipedia version of that discussion:

In Life, the Universe and Everything, Prak, a man who knows all that is true, confirms that 42 is indeed The Answer, and confirms that it is impossible for both The Answer and The Question to be known in the same universe (compare the uncertainty principle) as they will cancel each other out and take the Universe with them to be replaced by something even more bizarre (as described in the first theory) and that it may have already happened (as described in the second).

My point is that attempts to answer ultimate questions often devolve into nonsense, sometimes humorous nonsense and sometimes just boring nonsense. Let's see if I can at least avoid the boring nonsense.

From a purely physical point of view humans, and in fact, all life, are ideal mechanisms for collapsing energy gradients. An energy gradient is simply a span of space in which the heat content is higher at one point than another. As you might surmise, the universe is chock full of energy gradients, and they can be exploited to do work for us: to grow crops, mine minerals, manufacture goods, transport those goods, and provide the myriad comforts that constitute modern life.

The energy gradient most important to humans is the one spanning the distance from the Sun, a giant thermonuclear furnace, to the Earth, a coolish, rocky planet. With a universe of countless stars and planets, this example suggests that life is likely to be quite prevalent across the cosmos. In fact, the Second Law of Thermodynamics--the one that tells us that entropy is moving us toward a universe of less and less order and thus one seemingly less and less amenable to life--actually favors the formation of life because life itself depends on the energy gradients which are the basis of the Second Law.

All well and good then. We could stop here and announce that the overarching cosmic purpose of human beings is to collapse energy gradients by dissipating the energy they provide, energy that allows us to live and conduct our daily business. We need only eat and then burn the calories by walking to get into a vehicle which in turn burns more energy and then go somewhere to buy something produced by a factory that is busily collapsing energy gradients for a profit. We could also just sit at home burning calories at our basal rate of metabolism--perhaps with the furnace or air conditioning on--in order to get similar results. We are mere agents of the Second Law of Thermodynamics, remorselessly carrying out its dictates to move the cosmos continuously toward a more and more entropic state--one that will end with the heat death of the universe in which all energy is evenly distributed, meaning no energy gradients exist. Without the gradients, essentially nothing happens, nothing changes.

(For a full and captivating account of the relationship of life to energy, I recommend reading Into the Cool.)

At the other end of the spectrum, humans are considered the vessels of consciousness, perhaps the only living beings to have self-awareness including an awareness of their own inevitable death. We know thoughts exist because we have them. And yet, they are dimensionless abstractions, objects without weight or substance.

Our purpose in life, according to many contemplative traditions, is to ponder the universe in order to understand it and in order to commune with it in some profound way. Some traditions, however, seek to manipulate the universe to our liking. The scientific method is a contemplative tradition of sorts that seeks to apply what we learn about the workings of the universe in order essentially to speed up the degradation of energy gradients in pursuit of greater control over our environment. This presumably leads to better lives that come from that control. On the other hand, the mystic religious traditions seek to gain a direct apprehension of the mystery of the universe, one beyond words and thus inexpressible except through the changed attitudes and behaviors that result from such enlightenment.

The description of these two paths is a bit more inspiring than the description of humans as mere agents of the Second Law of Thermodynamics. But, both depend on that law and our role in collapsing energy gradients.

What is being called into question today is not our basic need to live on the energy gradients available to us on Earth. No humans can exist without such gradients or be blamed for doing what nature designs humans to do, namely, to seek out those gradients wherever they are and use them to enhance our survival and our ability to propagate. This innate drive actually forms the basis for what we call culture: art, architecture, music, and literature. Without high degrees of energy dissipation, such cultural emanations would not be possible for we would all have to live close to the land and eke out a bare existence.

As it turns out, surpluses--that is the extra energy that farmers produce in the form of food and fiber and that which those who extract energy-bearing minerals such as coal, oil, natural gas, and uranium produce beyond what they need for themselves--are the basis of civilization. Surpluses have allowed at first a few and now a huge number of people to carry on livelihoods that merely consume the surplus. The ancient Romans achieved a complex culture and empire powered by the Sun in the form of surplus wheat and Mediterranean winds for sail transport. Today, of course, we've built our complex civilization using energy-dense fossil fuels that vastly enhance our production of food and that power a worldwide mining, manufacturing and logistics system.

What is being called into question today are both the rate at which we are exploiting the Earth's available energy gradients and the sources of those gradients. In practical terms, this means the rate at which we are consuming the nonrenewable energy resources mentioned above and the rate at which the fossil fuel portion of those resources is spewing climate changing gases into the atmosphere.

In part, it is a question of goals. Our avowed goal these days is to grow continuously the rate at which we collapse energy gradients. This gives us what we call wealth and is believed to increase our well-being. The second assertion is the object of hot dispute and the center of our inquiry here.

Alan Watts, the great interpreter of Zen to the West, liked to point out that we don't sing a song or dance a dance to get to the end. These pursuits are enjoyable in their process, not their completion. The arts are often characterized as the highest fruits of civilization, and yet, they represent pursuits which are good in and of themselves, and not for some purpose outside of themselves. We enjoy beauty for itself, not in order to get something done. Beauty is the end, not the means.

The huge amounts of work which we can get done by exploiting the energy gradients available from fossil fuels and uranium have caused us to become overly concerned with means. We can now accomplish so much that we spend very little time contemplating what is worth accomplishing. Almost everything becomes an instrument to accomplish something else, all in the service of raising the rate at which we collapse energy gradients which is thought to lead to wealth which, in turn, is thought to lead to well-being.

The argument which we are now engaging in and will be forced to engage in for a long time is this: What rate of exploitation of the Earth's energy gradients is sufficient for a good life? Our answer for the past century and a half has simply been "a higher rate." And yet, on its face this answer has no qualitative component. That higher rate has included devastating pollution and destruction of the natural landscape; the possibility of catastrophic climate change; vast economic and social inequality and the social and geopolitical tensions and violence that go along with them; and endemic illness borne of degraded diets poisoned with chemicals that are said to reduce crop loses from weeds and insects. The list is very long indeed. Many of the tasks we do, which use up some available energy gradient, seem to make things worse for us, not better.

So, is there some optimum rate of energy gradient exploitation? Again, it depends on one's goals. If the goal is to extend the continuity of the human species far into the future, then the answer is a rate far below the current one--a rate commensurate with the rate at which renewable energy can produce power. If the goal is to throw the biggest, most energy-intense party ever thrown, then the rate must be increased. But the consequence of that will be a far shorter reign for humans, or at least for the technical civilization we've built. That civilization remains almost entirely dependent on nonrenewable fuels that must someday start to decline and take our current civilization with them--unless, of course, we drastically restructure our civilization before that day by, for instance, greatly reducing our rate of energy use.

But, moderation has gotten a bad name in the age of fossil fuels and uranium-235. We imagine that moderating our consumption will leave us poor and unhappy, partly because a century of advertising has convinced us of this. But moderation and even asceticism have long and venerable histories. There are, of course, the religiously-inspired ascetics who report that living simply actually increases one's happiness. Essentially, what they are saying in energetic terms is that lowering the rate of exploitation of energy gradients is good for the soul.

Moderation has a nonreligious heritage, too. Epicureanism, first and foremost, refers to an ancient Greek school of philosophy that, contrary to popular understanding, proposed moderation in all things in pursuit of a pleasurable life. It preached that overindulgence can lead to pain and suffering and thus the opposite of a pleasurable experience. (For a contrasting Greek school of philosophy, see the Cyrenaics who emphasized the intensity and immediacy of physical sensation as the primary avenue to a pleasurable life.) Epicureanism is thus another form of lowering our rate of exploitation of energy gradients, but in this case, in order to heighten our pleasure--for the long term, of course.

I offer these last two ways of thinking about our energy use to suggest that the idea that humans are evolutionarily designed ONLY to seek out ever more energy gain may be flawed. Clearly, there is a portion of humanity that understands that maximum energy gain does not necessarily coincide with maximum happiness. Indeed, excessive energy use may actually reduce one's happiness suggesting that perhaps OPTIMUM energy gain would be a better goal.

We humans are by our very nature energy dissipating structures. As it turns out, the rate of energy dissipation that makes for a good life is a persistent question in philosophy--just not put in those terms. Our age is now obliged to face quite directly what rate offers maximum happiness or at least maximum satisfaction--taking into account the broadest meaning of those words including the desire to belong; to love and be loved; to experience the full range of physical, emotional and spiritual experiences available to humans; and even the desire for meaning itself.

I don't suspect you've been laughing at my exploration of the issue of ultimate meaning as you might at Douglas Adams' fictional and facetious quest for the same. But, I hope you have at least been entertained. I can't help but focus on my role as a dissipative being. It's really what I write about every week. But in the end, that focus is too narrow to capture the experience that is being human. In fact, I don't think there are any words or concepts that can easily summarize what it is to be human and what constitutes a good life. The universe and our place in it remains as ever unfathomable.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at

Sunday, May 19, 2013

Will the International Energy Agency's oil forecast be wrong again?

The famous Danish physicist Niels Bohr once humorously observed, "Predictions are very difficult, especially about the future." And so, as the world considers yet another rosy oil supply forecast, this time from the Paris-based International Energy Agency (IEA), it is worth reviewing the agency's record.

Back in the year 2000, the IEA divined that by 2010, liquid fuel production worldwide would reach 95.8 million barrels per day (mbpd). The actual 2010 number was 87.1 mbpd. The agency further forecast an average daily oil price of $28.25 per barrel (adjusted for inflation). The actual average daily price of oil traded on the New York Mercantile Exchange in 2010 was $79.61.

(The IEA included in its 2000 supply projections not only crude oil plus lease condensate, which is the definition of oil, but also natural gas plant liquids--only a small fraction of which can be substituted for oil--and refinery processing gain which is the result of applying energy to break oil into its components, causing the final volume to expand. The agency refers to the resulting number as "oil" supply. But, clearly this number is not really just oil supply, and this practice continues to confuse policymakers and the public.)

So, what made the IEA so sanguine about oil supply growth in the year 2000? It cited the revolution taking place in deepwater drilling technology which was expected to allow the extraction of oil supplies ample for the world's needs for decades to come. But, deepwater drilling has turned out to be more challenging than anticipated and has not produced the bounty the IEA imagined it would. This is not to say that it hasn't been a critical adjunct to world oil supplies. It's just that deepwater oil production hasn't been able both to make up for declines in production elsewhere AND grow supplies beyond that--something that has resulted in a bumpy plateau for world oil production (crude plus lease condensate) starting in 2005.

Now, the IEA tells us that a "revolutionary" new technology called hydraulic fracturing--actually, a newly deployed variant called high-volume slick-water hydraulic fracturing--is going to cause what it calls a "supply shock" that spells ample and rising oil supplies. But, despite years of such drilling in the United States--which the agency says will be the center of this "shock"--world oil prices remain near all-time highs as measured by the average daily price. And, world oil production (crude plus lease condensate) has only occasionally bounced above 75 mbpd in the last seven years before retreating downward.

Perhaps the IEA means that using these new techniques to unlock so-called light tight oil deposits beyond the United States will bring about this supply shock? Nope. The report states specifically that over the forecast period through 2018, the IEA does not expect significant development in other countries of these deposits using the new type of hydraulic fracturing.

Perhaps the agency noticed the withdrawal of ExxonMobil Corp. last year from Poland. The company said it could not find commercial quantities of hydrocarbons in what had been billed as Europe's most promising shale gas deposits. Shale gas, of course, is extracted using the same fracking techniques as tight oil. And, both oil and natural gas tend to appear together in such deposits.

And then, just prior to the release of the IEA's latest forecast, Talisman Energy Inc. and Marathon Oil Company pulled out of Poland as well for similar reasons.

The point is not that there is no exploitable tight oil or shale gas outside the United States. Rather, the quality of those resources varies far more than the industry has led the public to believe. At first, the oil and gas industry portrayed such deposits as subject to what it called the "manufacturing model." The notion was that a company could drill anywhere within known deposits and extract commercial quantities of oil and/or natural gas.

The reality is far different. Even in the United States--the center of the putative boom--drillers have ended up focusing on a few "sweet spots" that yield commercial quantities of oil or natural gas. These can represent as little at 15 percent of the total area of the formation.

The IEA seems to be unaware of certain key information that is publicly available or doesn't understand the significance of that information. And, the agency doesn't seem to remember what it said in its last forecast. Here is a sampling:

  • The production decline rate of hydraulically fractured tight oil wells is around 40 percent PER YEAR in the two most prolific plays, Eagle-Ford in Texas and Bakken in North Dakota. This means that drillers must replace 40 percent of last year's production capacity EACH YEAR before they can increase the overall rate of production from their tight oil wells. The average annual production decline rate for existing wells worldwide is around 4 to 5 percent. Essentially, the IEA doesn't appear to understand that it is expecting oil extracted from wells that decline at a rate 10 TIMES FASTER than average wells worldwide to make up for worldwide declines elsewhere AND provide significant growth in world oil supplies. But, the agency apparently did not look at publicly available well data from each state to determine annual decline rates and their implications for future supply. The IEA seems simply to have taken self-interested industry forecasts on their face--forecasts made with an eye toward engendering confidence among investors and lenders and thereby pumping up the value of lucrative stock options held by company insiders.

  • The IEA expresses concerns about adequate infrastructure for the tight oil producers. Yet, the agency does not seem to be aware that the oil producers in the Bakken play refused to support a pipeline that would have given them their first pipeline access to major oil centers, preferring instead to rely on rail transport. Contrary to their public pronouncements, could it be that the oil producers don't really believe they have enough oil in the long term to support a pipeline and therefore did not want to make long-term shipping commitments to a pipeline company? Perhaps the oil companies would rather saddle the railroads with the capital costs of new tank cars so the oil producers won't be on the hook for any long-term infrastructure costs associated with transporting their oil.

  • The IEA talks about a surge in U.S. natural gas production. Yet, it seems unaware that natural gas production in the United States has been flat since January 2012 even as domestic gas prices rose from $1.82 per thousand cubic feet to above $4 today. The so-called shale gas boom has ended, and we are now finding out just how costly it will be to bring that gas out of the ground. Correspondingly, the rate of extraction will not be so great as promised either.

  • In just a few months time, the IEA has dramatically altered its view about the trajectory of world consumption of liquid fuels. Its 2012 World Energy Outlook released in November prophesied that world demand would reach 99.7 mbpd by 2035. The more recent report mentioned at the beginning of this piece, the Medium-Term Oil Market Reportnow projects that world demand will reach 96.7 mbpd just five years from now, implying a growth trajectory far in excess of that projected in the agency's 2012 report.

  • The IEA says it does not forecast prices and then tells us it uses the futures prices for its model. What its model implies is continuing high prices for oil and oil products. The IEA makes no attempt to understand the effect that high prices have on the world economy and its ability to grow under such circumstances. Nor does it address the dampening effect of high prices on demand, calling into question its projection of rapid increases in demand.

  • The IEA then tells us that so-called oil production "capacity," the basis of which is never described, will grow faster than demand. This would imply falling prices as excess capacity overhangs the oil markets. But that would mean that the high prices which it agrees are needed to extract tight oil profitably would disappear. So, how would this allow tight oil volumes to grow dramatically if extraction is unprofitable or only marginally profitable? This contradiction is never addressed.

  • Burning all the known reserves of fossil fuels would put us on a path to a climate catastrophe, something the IEA acknowledged in the executive summary of its 2012 World Energy Outlook saying, "No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal, unless carbon capture and storage (CCS) technology is widely deployed." CCS technology is not being widely deployed, nor is it likely to be. By contrast the agency's most recent forecast reads like a promotional brochure for the North American oil and gas industry. How does that square with the agency's concern about climate change?

It's not unusual for government-sponsored organizations such as the IEA to be given contradictory directives, in this case, to promote adequate energy supplies and also to warn about climate change. There has been little mention of this contraction in the media because the media has focused on what it perceives as sensational news about oil and natural gas supplies in North America.

Given that focus, it is troubling that neither the agency nor the media have bothered to revisit past forecasts. It turns out such forecasts fail so often that it's puzzling that the media, governments, corporations, and the public put so much faith in them. Those whose plans were based on the IEA's 2000 forecast were completely blindsided by developments just a few years later.

We would be much better served by looking at what we know right now from publicly available figures about actual trends. It's not as exciting as dramatic predictions about a future of plenty--or one miserable from want. But it's a far firmer basis for sound policy.

UPDATE: Not surprisingly, it is the foreign press which is reporting signs of fatigue in the tight oil boom in America. The American media has been thoroughly bamboozled by the industry. See "US shale boom starts to fade" in the Australian publication The Age.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at

Sunday, May 12, 2013

Why the renewable energy industry ought to support U.S. natural gas exports

U.S.-based industries and utilities that consume a lot of natural gas have been trying to figure out just how to respond to proposals in Congress to allow expanded natural gas exports, a move that could significantly raise the price of one of their chief inputs.

But, there is one segment of U.S. industry that ought to be cheering for such an outcome--though I doubt that its leaders will be offering their support in anything above a whisper. The renewable energy industry would benefit from higher natural gas prices--and higher coal prices, for that matter--since, as these fuels for electric power plants become dearer, renewable energy sources become more competitive. The costs for renewables are in the production and installation of the solar panels, wind towers and dams; the fuels--sunlight, wind, and water--are essentially free.

But it would seem almost unpatriotic to cheer for higher energy prices in America. Higher prices--all things being equal--tend to depress economic activity. And, higher energy prices also tend to make American goods less competitive on world markets by increasing the costs of many inputs. Hence, my observation that the titans of the renewable energy industry will probably stay largely mum in the fight over expanded exports of U.S. natural gas.

But there are good reasons for the American public to shoulder the burden of higher energy prices now to help build a more secure future. First, climate change is already on course to destroy the way of life that Americans say they want to preserve. Second, there is no chance, NONE, that fossil fuels can sustain American society and the world in the long run. Only renewable energy can offer the promise of essentially perpetual supplies.

This second reason tells us that we must make an energy transition at some point. And, given the uncertainties about fossil fuel supplies and the wars and conflicts they engender, it would be wise to make that transition as soon as possible. In addition, history has shown us that energy transitions can take two generations. No one can say for certain whether fossil fuel supplies can continue to grow or even remain stable for 50 years to see us through such a transition. And, we will need to use fossil fuels to build the renewable energy economy. If we use them instead simply to have one last energy orgy, there may not be enough left to build the renewable energy infrastructure needed to replace them.

But the first reason, climate change, tells us that we must embark on the needed energy transition now. We cannot wait to see how things turn out. The melting of sea ice and the tundra tells us that time is up. Extreme droughts and floods--predicted by climate models--have already arrived and are the cause of soaring food prices and extensive property damage. Since the effects of warming lag by about 40 years--because the oceans take so long to warm--we are only seeing the effects of greenhouse gas emissions through the early 1970s. Even if we stopped emitting all greenhouse gases today, we'd still have 40 or so more years of warming ahead of us.

The best and most precise way to encourage energy conservation and a renewable energy buildout would be a steadily rising carbon tax. But, in the absense of sensible energy policy, it might now be time for those concerned about the ongoing delay in building the renewable energy economy to embrace world prices for all energy here in the United States.

Coal and oil already trade at world prices in the United States since they can be shipped to the highest bidder worldwide. (Even though crude oil exports from the United States are restricted, we produce far less than we consume and the effect is the same as if we had no restrictions.) Natural gas is essentially trapped on the North American continent because there are currently no operating export terminals that can liquefy the gas for transport by special liquefied natural gas carriers. Some export terminals are planned, however, and one is actually being built now in Louisiana.

There will be a fierce battle fought over just how much natural gas should be allowed to leave the United States for more profitable markets in Europe and Asia. And, that battle might be fought against the backdrop of rising prices as current wells deplete rapidly without adequate drilling to replace them.

Some will say that rising natural gas prices will cause utilities to switch back to coal. But, a switch back to coal en masse by utilities seems unlikely given the emerging regulation on greenhouse gas emissions. Instead, utilities are increasingly likely to favor renewables to help  them to comply with those regulations.

In whatever manner higher prices are achieved, they will be better for America in the long run since they will hasten the day when the country can say goodbye to fossil fuels as its main energy source and reroute them to more valuable and critical purposes. Those include making fertilizers, pharmaceuticals, fabrics, industrial chemicals, and plastics of all kinds, all of which are far better uses of oil and natural gas than simply burning them and wrecking the climate in the bargain.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at

Sunday, May 05, 2013

Patient contrarians: The natural gas market isn't what it seems

Maybe it's the gloomy Seattle weather that has made investment manager Jim Hansen and his son and partner, Kevin, at Ravenna Capital Management immune to oil and gas industry hype about the supposed U.S. shale gas "revolution." More likely it is thorough research focused on making their clients money and keeping that money out of harm's way.

The Hansens are patient contrarian investors whose time horizon is generally several years. They can't help you if you want advice on next week's or next month's natural gas price. In fact, they're not sure anyone can reliably help you with that. So they focus on much longer-term trends, and they think they've spotted one in the U.S. natural gas market.

About a year ago when domestic natural gas prices hit levels reminiscent of the 1990s, they began to move their clients into natural gas related investments. Amid the media hype about cheap natural gas for decades, they saw a different reality.

They believed that high production decline rates in shale gas wells--which now provide about 40 percent of U.S. production--were combining with rapid reductions in the drilling of new wells in a way that would eventually cause falling production and sharply rising prices. They weren't exactly clear on the timing. But, with their patient strategy, they just needed to sit and wait for what they felt was the inevitable.

"We are long-term investors and include investments that allow us to get paid to wait," Jim Hansen said, referring to securities that generate regular payouts to holders.

A year after their call, they have seemingly been vindicated as natural gas rose from a low of $1.82 per thousand cubic feet in April 2012 to over $4 currently. Prices might dip again, Jim Hansen added, but for long-term investors the trend still looks good.

What clues led the Hansens to their contrarian views? Kevin explained in one phrase: Look at what the industry does, not what it says.

While hyping the future of natural gas, the industry was doing the following:

  1. Organizing their natural gas gathering systems into master limited partnerships and selling them to investors.

  2. Selling producing acreage to foreign investors who, believing the hype, generally overpaid.

  3. And when gullible foreign investors got wise, selling land packages at rock bottom prices when many companies were desperate to raise cash to meet their debt obligations.

Despite industry protestations to the contrary, all these things told Kevin Hansen that the industry "could not have been profitable." His views were eventually verified by none other than Rex Tillerson, CEO of ExxonMobil Corp., who told an audience in late June last year, "We are losing our shirts [on natural gas]."

Just recently one chastened industry executive, Matt Fox, ConocoPhillips' executive vice president of exploration and production, let slip what price level might entice companies to increase U.S. natural gas drilling again. During an April 25 conference call with analysts he had this exchange with analyst Blake Fernandez:

Fernandez: Okay. Great. Secondly, I guess it's on the natural gas side, I always view Conoco as having probably more leverage than peers do, U.S. Natural Gas, and certainly that creates some optionality. Obviously, we haven't heard anything on increased activity just yet, but is there a certain price that we should ear-mark as say, $5 [per] MCF where maybe you would begin to increase activity there?
Fox: We do have a lot of potential there, to invest. But we're really focused in on investment now on the liquids-rich assets [oil wells and also natural gas wells that yield large amounts of higher value ethane, propane, and butane] and of course we get associated gas [gas associated with oil wells] with that so we benefit from the gas price there. I would say that I wouldn't see us redirecting any capital towards gas assets until it's significantly north of the current prices. (emphasis added)

Apart from the awkward geographic analogy so popular on Wall Street these days--"north" simply means "higher"--it's not clear what "significantly" means. But since the questioner already offered the figure of $5, both Hansens believe Fox meant higher than that.

The general problem that Kevin Hansen sees is that oil and gas companies are going to continue to prefer to drill oil wells as long as the price of crude floats near the $100 level. They will be reluctant to redeploy drilling rigs to natural gas fields until higher gas prices have been sustained for quite some time, perhaps several months and maybe longer.

But with the rapid production decline rates in shale gas wells already bringing storage down below the 5-year average and more than 30 percent below year ago levels, both Kevin and Jim Hansen expect production to undershoot and prices to overshoot, perhaps dramatically, before a ramp up in new drilling begins in earnest. That means very high volatility in the U.S. natural gas market in the not-to-distant future.

Add to that any of the obvious pulls on natural gas supply--a very hot summer (electricity demand from natural-gas-fired power plants), a very cold winter (heating demand) or a hurricane (damage to gas production in the Gulf of Mexico)--and you have the makings of a true crisis in supply. Even absent any of these, they expect prices to jump significantly in the coming two to three years.

So, what do things look like after we pass through the crisis? Kevin explained that he expects the natural gas price to settle at levels much higher than today. And, those prices will bring out the supply needed to meet demand. The exploitation of the country's large shale gas resource will then proceed in a more orderly fashion for several years.

But, dreams of vast, cheap supplies, say, at around $3 or $4 per thousand cubic feet, will be gone, and, with it plans for many new natural gas export terminals. Kevin believes that most of the export terminals now on the drawing board will never get funded. The math works like this: Export terminal operators generally work under cost-plus contracts. If the U.S. benchmark Henry Hub natural gas price is consistently at or above $6, then it won't be particularly competitive in Europe, an obvious market for U.S. liquefied natural gas (LNG).

After purchase it costs about another $6 to liquefy the gas, ship it and then regassify it. With European LNG prices currently running around $12 that would make U.S. imports only just competitive. Will buyers want to commit themselves to long-term cost-plus contracts with U.S. suppliers when prices have shown themselves to be so unstable as he believes they will be in the coming supply crunch?

Other pie-in-the-sky schemes that depend on cheap natural gas are likely to whither as well. He cites South African energy and chemical giant Sasol's dream of building a so-called gas-to-liquids plant in Louisiana, one that would turn natural gas into diesel and other products.

Given the high production decline rates, he believes that once U.S. shale gas resources are tapped out, "it's 2005 all over again." The country will be faced with declining natural gas production as it was in 2005, but this time with no relief in site. And unlike the industry, he doesn't think that scenario is decades away. Take the "s" off of decades, he says, and you'll likely be closer to being right about the timeline for America's next rendezvous with persistently falling domestic natural gas production.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at