Beware of Bogus Energy Schemes!

A friend of mine (whose name I won't use here) recently asked me for my opinion on one of those "amazing oil discovery" articles that some of us get as e-mail (or snail mail) from time to time.  You probably know the kind: it's the "Mother of All Discoveries," and it will make America "totally energy independent," ushering in a new era of prosperity and paradise (at least until it runs out, anyway).  This is typically followed by how you should join me  in some amazing investment scheme which seems almost "too good to be true."    

Here is my reply, altered only very slightly, for the sake of this blog.

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Greetings:

Hope you guys are doing well in the New Year.  Thanks for sending this.  It is actually very relevant to the class I am teaching this semester, at University of Redlands (on “The Political-Economy of Energy Resources”).  

With regard to what you've sent me, below, and as most economists will tell us, there are two basic sets of issues to always consider: supply, and demand.  

Articles like these (so very enthusiastic about supply, about "finding the next Big One," and then typically for soliciting investors in it) tend to be relatively heavy on supply side thinking, and relatively light on demand side thinking.  Additionally, what is often not in the picture at all is the issue of true costs associated with the full range of activities related to this type of endeavor.   [More on that, later.]

And, with a special touch so in keeping with our times, it seems, the author makes the assertion that people who disagree with his fundamental analysis must be “socialists.”  I will deal with his logic and his ideation in stepwise fashion. 

Step 1: 

Let's closely read the firs part of the United States Geological Service (USGS) source document entitled, “3 to 4.3 Billion Barrels of Technically Recoverable Oil Assessed in North Dakota and Montana’s Bakken Formation . . .”  (Released: 4/10/2008 2:25:36 PM),  which seems to have initiated so much buzz in the minds of the author(s) of the e-mail you’ve forwarded to me.  The first three sentences / paragraphs of the USGS web article read as follows:  

"Reston, VA - North Dakota and Montana have an estimated 3.0 to 4.3 billion barrels of undiscovered, technically recoverable oil in an area known as the Bakken Formation.

A U.S. Geological Survey assessment, released April 10 [2010] , shows a 25-fold increase in the amount of oil that can be recovered compared to the agency's 1995 estimate of 151 million barrels of oil.

Technically recoverable oil resources are those producible using currently available technology and industry practices. USGS is the only provider of publicly available estimates of undiscovered technically recoverable oil and gas resources." 

[End of quote.  Emphasis in bold added by me. – BDP] 

Step 2:

Starting with the bottom paragraph here, conceptually, and working our way back up in reverse fashion, let’s break this material down, as follows:

Third paragraph:  Please note the word “undiscovered” (which curiously did not appear in the actual title of the article / press release).  As the old saying in the oil business goes, “You cannot produce what you’ve not yet discovered.”  So, the use of this term here lets us know—right off the bat—that the USGS is using some form of statistical modeling to project (or otherwise conjecture) what “might be” sitting there, under the ground.   Furthermore, building upon those projections in like fashion, it has further estimated the percentage of that hypothetical oil (the oil which “might” be there) that “might” actually be recoverable (it is never the case that 100% of projected amounts of oil in the ground are recoverable, due to the law of diminishing returns).  In short, what we have here is a “second order projection,” or, projection based on a prior projection.   [Does this kind of thinking sound familiar?  Think back to the Wall Street Crash of ’08.  Can you say, “derivatives?”]

·       

Second paragraph:  Compared to the year 1995, it may well possible that there actually has been a 25-fold increase in recovery capacity, in this case, due to more advanced (and more expensive) types of technology, which are now available to us.   Advancements in technology work hand-in-hand recoverable reserve estimates, also.  This is effectively, the “bridge concept,” wedged as it is, between the first, and the third. 

First paragraph: Okay, now let’s do some math (combined with a little social psychology).  Let’s assume the higher figure of 4.3 billion barrels to be an accurate projection.   On the supply side of things, and psychologically (which really has to do with the “human perception of available supply”), this sounds (or “feels”) like a large figure, right?  Question: but, what volume of oil do Americans actually consume in a given time period?  In short, what is the actual “burn rate” for oil?  Answer: On the demand side, Americans consume approximately 20 million barrels of oil per day (70% of which goes towards transportation fuels, by the way).   The mathematical calculation: 4.3 billion (with a “B”) recoverable barrels in the ground here, divided by 20 million (with an “M”) barrels consumed per day, equals a projected of supply of 215 days’ worth of oil.  And that is close to roughly a 1-year supply of oil for America, not including weekends and holidays (assuming approximately 220 “working” days per calendar year).   Shown numerically, this calculation would appear as follows:  4,300,000,000 / 20,000,000 =  215.

Additional costs to also consider (referred to in old School, neoclassical  economics as “externalities”):  the inherent messiness of the oil extraction process can bring on at an array of losses to be incurred in diverse areas of activity, such as public health, tourism, wildlife management, and public safety (example: the US side of the Gulf of Mexico, before and (especially) after Deepwater Horizon disaster of 20-Apr-10.      

Step 3:

And finally, I invite you to consider the following: US petroleum production has been gradually declining since the year 1970 (all the way back to the Nixon Administration!).  This is based on "actuals" and not “projected,” or “undiscovered,” or “hypothetical,” but real, hard, “actually-existing” numbers.  This is what the US has really been producing, in gigabarrels (billions of barrels) per year, from the years 1930 to 2004.  The United States produced just short of 3.5 billion / year in 1970.  Sources for this data are many, and varied (simply Google "Energy Bulletin" and then go to its "Primer" section, for a start).   

Again, it's important to recall the issue of supply versus demand.  On the supply side: the peak domestic oil production year for the US was in 1970—and we have never produced any more oil than in that one year.  On the demand side: US imports had already “very quietly” outstripped supply way back in the 1940s, after World War II (part of the reason for US success in the War had been its prodigious pre-War oil supplies, much of which was consumed in the process of prosecuting the War).  That post-1970 (post-peak) downward slope has continued, unabated through 2010.    [Hence the reason for the Administration of an ailing President Roosevelt  developing "that special relationship” between the Saudi Kingdom and the United States of America, by the way.]   

Will this / could this “discovery of undiscovered oil”--in which the author(s) ask us to put our faith (and possibly even our energy investment dollars) actually reverse this long-term trend of petroleum depletion?   I would tend to think not.   

CONCLUSONS

First, the e-mail sent to me, originally dated  24-Dec-09, seems to be prefaced with a lot of right-wing extremist hyperbole.  This serves only to distract and/or agitate any potentially serious investor, or any serious researcher.  Please note the use of language:

"This is from the US Geological Service.  NOT BOGUS Al Gore BS.   You can look it up [which I’ve actually taken the time to do, above--BDP].  Reference is at the bottom of this email. Couple this with the information coming out of England about the falsehoods of global warming one can easily see we are being duped [I conclude that this is clearly true, but not in the way that the author intends to convey, I’m sure--BDP]  The British, Australian and European press is providing coverage about the bogus climate warming debacle.  Meanwhile, the likes of the NY Times (we don't report on information that was not intended for the public except the classified information in the Pentagon Papers or Abu Graib prison and MANY MANY other examples) ABC, NBC, CBS, MSNBC, CNN, the Washington Post will not cover this story at all.  Wonder why???  Because the information contradicts there philosophy and their socialist agendas."

[End of quote] 

This paragraph alone would be enough to scare me away from anything that which might come out of this person’s head, next.   But more does come, which I interpret and summarize here: 

·         We’ve been asked to believe in the actual existence of an “as-yet-undiscovered” amount of oil, somewhere in the upper mid-West of the United States.

·         We’ve been further asked to believe that we have the technological capacity to harvest that undiscovered oil.

·         We’ve been asked to join the author(s) in the “leap of logic” from this undiscovered oil to “total energy independence,” at some point in an indeterminate but not-too-distant future.

·         By either omission or commission, we will not conduct the “full-spectrum analyses” of estimated actual costs associated with the extraction process, related to this undiscovered oil.

By inference, anyone who deigns to disagree with the author(s) shall be deemed “a socialist.” [Refrain from a classic episode of Seinfeld: “Not that there’s anything wrong with that!”]

And finally, last but not least, is the author’s own closing remarks to this e-mail: 

Now I just wonder what would happen in this country if every one of you sent

this to every one (sic) in your address book.

By the way...this is all true. Check it out at the link below!!!

GOOGLE it, or follow this link. It will blow your mind.

http://www.usgs.gov/newsroom/article.asp?ID=1911

My reply: Well, Mr. X, you certainly do exude a kind of enthusiasm for the USGS material you’ve just referred to, here; and your use of the English language is certainly . . .  uh, well  . . . “colorful.”  However, as far as analysis and interpretation of actual oil production data is concerned , there are just a few “technical steps” which seem to have gone missing in your  forest of hyperbole.  I suggest you re-visit the points I’ve outlined here, at your earliest convenience.  In the future, kindly reduce the rhetorical hype, and increase the hard-nosed science and policy analysis (additionally, some kind of grounding in recent US history would not hurt, either)—assuming your goal is to deal with people accurately and honestly.  And by all means, please do so before your decide to send out any other e-mails on this particular matter, as it is a matter of national interest.      

Okay, so I have now gone to the source material, per the author(s) suggestion, and I’ve run the numbers myself.  This was done based on my prior academic knowledge and experience, of course.  If I were to do some conjecturing of my own, at this point, I would conjecture that the original author of this e-mail was assuming that most people would not bother to go to the level of detail I’ve just used; and in this particular case, he may well have been correct!  Likewise, he may have simply thought that people think in the same way he does (and if they don’t, they should).  I can’t say for sure on that particular note.  Be that as it may.  Indeed, what really “blows my mind” in all of this is the sheer volume of people who continue to think in this 19^th century way, regarding our 21^st century national energy resources— in spite of a significant and growing body of evidence to the contrary. 

Blaine