An interesting mini-essay from Manhattan Institute. To wit: so much data (big data) is being generated about easy-to-reach locations of oil shale that it will ultimately cause oil prices to collapse.
| John Shaw, chair of Harvard’s Earth and Planetary Sciences Department, recently observed: “It’s fair to say we’re not at the end of this [shale] era, we’re at the very beginning.”[5] He is precisely correct. In recent years, the technology deployed in America’s shale fields has advanced more rapidly than in any other segment of the energy industry. Shale 2.0 promises to ultimately yield break-even costs of $5–$20 per barrel—in the same range as Saudi Arabia’s vaunted low-cost fields. |
In other words, high-tech is reaching aspects of the economy that would have seemed far-fetched not that long ago.
The author:
| Mark P. Mills is a senior fellow at the Manhattan Institute, CEO of the Digital Power Group, a tech-centric capital advisory group, and Faculty Fellow at Northwestern's McCormick School of Engineering and Applied Science. |
No dummy, he.
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His article was the basis of an article in Forbes, btw, which doesn't make him right, just believable. A lot of stuff in Forbes is wrong in the extreme, but sounds credible. They are known for it.
But technology does not solve the out of the ground to end usage cost pileup.
Most of all it does not solve a problem that Saudi does not have...water. And skilled workers are in short supply at what it takes to be that efficient in cost. Sloppily and more expensive and more than globally competitive. ..sure that we can do all the time. The last few sigma's of any phenomenon require an effort that are step function harder and rarer to find and sustain.
The organization's that extract and syndicate method of field investing won't allow that cost to be more than a hypothetical.
Lastly...The technologists forgot the biggest choke points....water and the cost of more regulation. Both will be costly to solve.
Lastly, please remember a cost of $6 a barrel out the ground is many a check point away from what you pay. With the pipelines and refineries and petrochemical facility sunk costs already in place...out of the ground higher but better condensate qualities and nearby pipeline and facilities will offset more oil production in many parts of the country.
So like the technology used by consumer channels was cobbled together after there was a clear business need given the blow transport costs took post oil shocks. ..so also...until there is a threat or challenge to existing models which makes it worth buying and mastering the technology oft available in the past but not profit changing until the model has to change.
I'm savvy enough to appreciate the contributions of some folks including but not limited to Mahn George, PhilfromWNY, SwirlingEddie, DanintheSprings, RB^2, etc but I've never been able to understand exactly what perspective the venerable Bill is coming from.
Here is my problem with many a technologists claims...yes the assumptions are now established such that next generation data mining will reduce the cost of shale extraction.
Except every mile from the refineries and downstream chemical building block facilities is more expensive. Every crude mix lower quality than the Eagle Ford or Haines or Permian is more expensive. Water or more expensive and a real problem. Transport more expensive. In a nation of 350 million the cost of the land for further finds more expensive. The allocation and custody transfer costs more expensive, flare gas monitoring more expensive. But that's not all of what they are missing. Every new technology is a wider harder to schedule and manage group of humans who take longer and delay ( assume a new fracking pit process is $3m a day to coordinate). Getting the syndicates together is more expensive. Paying for the old dead ends is a cash choke point. And the cost of speculation and hedging is increasing.
Lastly, there is a choke point of rigs, drills, and capable companies and refineries ( there are 160 odd refineries in the USA).
This is all on the extraction production refining and distribution side of what you pay.
On the world demand side do you really think the nation states that depend on the vig and who are none too stable are going to sit still and stable long enough for global prices to go down beyond a three to five year price war ( like we are having now)? We never have before.
Would you make massive investments in oil knowing the price point was going to go down to the natural gas level?
Lastly, note the premise. If We agree that some ...some Saudi oil can come to surface at $6....then pray tell why it is not ever sold at $6??
All in all, the cost drivers are moving towards greater total cost to consume even as the technology available ever improves...and there huge producers in the past century lie starved of the capital in this very capital intense business....Iran and Iraq...are unlendable. Iran needs and wants $300B in outside capital per year to meet its potential. It raised $11b three years ago...The most ever. And lastly, under current capital infusions Russia has about ten years of production at its current cost basis before it rapidly swings lower as a producer.
My issue is not that technology is available. My issue is that the same guys who are good at PDE math cannot also do a factor analysis on a napkin. technology available and technology used are two very different things driven by very different forces.
who needed operations research and OCR based shelf space needs per Sq ft per category before the oil shocks drove the cost of distribution and transportation up in the Usa. The technology existed. The business case for needing it was not there yet.
Are their businesses created by technology advances? Absolutely. Sometimes. Especially in military or communications. But do you think the suction of our nation's health insurance models had nothing to do with medical product innovation? Or gave a ready made market for medical RD to aim at?
Absent old fashioned analysis of the sector forces....what we can do and what will happen are often two different things.
Just in my observations and opinion.
The good thing about technology is that of things change more and more tools are around to solve the problems than ever before in history. That's a great thing and something to look forward to if you are a young person.
I can understand this and accept it, but one question, does this also take into consideration the non-direct costs of the US's reliance on foreign oil? I apologize in advance as I am very naive in this area but I always thought if the US could acquire oil from a non-middle east / OPEC supplier, even at a slightly higher cost, the country would benefit in the long run.
The fast majority of Me oil does not go to North America and has not since Bush 1 took steps to reduce our physical dependence while increasing our effort to insure global supply.
I'd look at our relationship with the House of Saud ( remember that's not the same thing as Saudi Arabia) as not an investment in oil...it's an investment in keeping our currency as the world's currency. So rather than look at it as a cost to us over an above the cost of oil...I look at it as insurance we are the global currency...and we collect many times the rent we would if we were not the global currency. It's much more useful reasoning ( it's the second derivative reality) when thinking about our foreign policy and a ROI on our military expenditures( spend peanuts if it does not affect our currency position backed by petro-stability and do what it takes if it does).
One more thing about going forward tech advances turning into cost reductions. Remember the sunk cost of equipment and operations and exploration takes 20 to 30 years to spin down as current fields built when the price was $75+ deplete first before dollar one of any new tech approach. So the biggest cost driver in a capital equipment based business is always ...sunk cost. Productivity gains are even much slower in a raw resource capital intense business. Oil already tapped is a lot more expensive to walk away from than a factory moved to Vietnam to take advantage of lower labor rates.
In sum, technology Sometimes creates a whole new business or product but changes in other factors per specific industry most often govern technology adoption rates. If there is not a business sector driver there is not a reason to adopt for adoptions sake.
And in some Industries the utility of new technology is dwarfed by the alternative...extracting from already sunk costs.
Imho
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