06.11.2014
By
now even the New York Times is openly talking about the secret Obama
Administration strategy of trying to bankrupt Russia by using its
oil-bloated Bedouin bosom buddy, Saudi Arabia, to collapse the world
price of oil. However,
it’s beginning to look like the neo-conservative Russia-haters and Cold
war wanna-be hawks around Barack Obama may have just shot themselves in
their oily foot. As I referred to it in an earlier article, their oil
price strategy is basically stupid. Stupid, as all consequences have not
been taken into account. Take now the impact on US oil production as
prices plummet.
The collapse in US oil prices since
September may very soon collapse the US shale oil bubble and tear away
the illusion that the United States will surpass Saudi Arabia and Russia
as the world’s largest oil producer. That illusion, fostered by faked
resource estimates issued by the US Department of Energy, has been a
lynchpin of Obama geopolitical strategy.
Now the financial Ponzi scheme behind
the increase of US domestic oil output the past several years is about
to evaporate in a cloud of fictitious smoke. The basic economics of
shale oil production are being ravaged by the 23% oil price drop since
John Kerry and Saudi King Abdullah had their secret meeting near the Red
Sea in early September to agree on the Saudi oil price war against
Russia.
Wall Street bank analysts at Goldman
Sachs just issued a 2015 forecast that US oil prices, measured by a
benchmark called WTI (West Texas Intermediate) will fall to $70 a
barrel. In September 2013, WTI was more than $106 a barrel. That
translates into a sharp 34% price collapse in just a few months. Why is
that critical to the US shale production? Because, unlike conventional
crude oil deposits, shale oil or tight oil as industry calls it,
depleted dramatically faster.
A comprehensive new analysis just issued
by David Hughes, a Canadian oil geo-scientist with thirty years’
experience with the Geological Survey of Canada, using data from
existing US shale oil production that has now become public for the
first time (the shale oil story is very recent), shows dramatic rates of
oil volume decline from US shale oil wells:
The three year average well decline rates for the seven shale oil basins measured for the report range from an astounding 60-percent to 91-percent. That means over those three years, the amount of oil coming out of the wells decreases by that percentage. This translates to 43-percent to 64-percent of their estimated ultimate recovery dug out during the first three years of the well’s existence. Four of the seven shale gas basins are already in terminal decline in terms of their well productivity: the Haynesville Shale, Fayetteville Shale, Woodford Shale and Barnett Shale.
A decrease in oil daily of between 60%
and 91% for these best possible shale oil regions means the oil
companies must drill deeper to even stay still with oil production, let
alone increase total oil volume. That means the drillers must spend more
money to drill deeper, a lot more. According to Hughes, the Obama
administration Department of Energy has uncritically taken rosy forecast
numbers given them by the companies that boost the US shale oil myth.
His calculations show future US shale oil output only 10% that estimated
for 2040 by the Energy Department.
Hughes describes the current deadly
dilemma of the shale oil companies as a “drilling treadmill.” They must
drill more and more wells just to keep production levels flat. The oil
companies have already gone after the most promising shale oil areas,
so-called “sweet spots,” to maximize their production. Now as production
begins to decline terminally, they must start drilling in spaces with
less rich oil and gas returns. He adds, “if the future of U.S. oil and
natural gas production depends on resources in the country’s deep shale
deposits…we are in for a big disappointment.”
Oil price collapse
What Hughes describes was the state of
shale oil before the start of the Kerry-Abdullah Saudi oil price war.
Now US WTI oil prices have dropped a catastrophic 25% in six weeks, and
still falling. Other large oil producers like Russia and Iran are in
turn flooding the world market with their oil to increase revenue for
their state budgets, adding to a global oil supply glut. That in turn
pressures prices more.
The shale oil and gas bonanza of the
past five years in the USA has been built on a foundation of zero
Federal Reserve interest rates and huge speculative investment by hungry
Wall Street firms and funds. Because of the ultra-rapid oil well
depletion, when market oil prices collapse, the entire economics of
lending to the shale oil drillers collapses as well. Money suddenly
vanishes and debt-strapped oil companies begin real problems.
According to Philip Verleger, former
head of President Carter’s Office of Energy Policy and now an energy
consultant, in North Dakota’s Bakken shale, one of the most important
new shale oil regions, oil at $70 a barrel could cut production 28
percent to 800,000 barrels a day by February from 1.1 million barrels a
day in July. “The cash flow will go down as the prices go down, the
amount of money advanced to these people to continue the drilling will
dry up entirely, so you’ll see a marked slowdown in drilling,” said Verleger.
Myths, Lies and Oil Wars
The end of the shale oil bubble would
deal a devastating blow to the US oil geopolitics. Today an estimated
55% of US oil production and all the production increase of the past
several years comes from fracking for shale oil. With financing cut off
because of economic risk amid falling oil prices, shale oil drillers
will be forced to halt new drilling that is needed merely to maintain a
steady oil output.
The aggressive US foreign policy in the
Middle East—its war against Syria’s al-Assad regime, its hardball oil
sanctions against Iran, its sanctions against Russian oil projects, its
cynical toleration of ISIS in Iraqi oil regions, its refusal to
intervene to stabilize the Libyan oil economy but instead to tolerate
dis-order are all premised on a cocky view in Washington that the USA is
once again the King of Oil in the world and can afford to play
high-risk oil geopolitics. The official government agency responsible
for advising the CIA, Department of Defense, State Department and White
House on energy, the US Department of Energy, has issued projections of
US shale oil growth based on myths and lies. That has led the Obama
White House to launch oil wars based on those same myths and lies about
the rosy prospects of shale oil.
This oily arrogance was epitomized in a
speech by then Obama National Security Adviser Tom Donilon. In an April
2013 speech at Columbia University, Donilon, then Obama’s national
security adviser, publicly expressed this: “America’s new energy posture
allows us to engage from a position of greater strength. Increasing US
energy supplies acts as a cushion that helps reduce our vulnerability to
global supply disruptions and price shocks. It also affords us a
stronger hand in pursuing and implementing our international security goals.”
The next three or so months in the US shale oil domain will be strategic.
F. William Engdahl is
strategic risk consultant and lecturer, he holds a degree in politics
from Princeton University and is a best-selling author on oil and
geopolitics, exclusively for the online magazine “New Eastern Outlook”
First appeared: http://journal-neo.org/2014/
First appeared: http://journal-neo.org/2014/
