Does US production follow a Hubbert's Peak model?

Yes. Kind've. Not quite.

Here's US oil production:



We see that the curve isn't symmetric: it rises a bit in 1985, drifts lower, then starts clearly rising in 2009.

Here's oil prices:

http://www.wtrg.com/prices.htm

This illustrates an important assumption in the Hubbert model: substitution. Hubbert drew his model from his experience with individual oil fields, where depletion of the field wouldn't affect the overall market for oil. The US as a whole is larger, but when oil production in the US peaked, it could still import oil, so prices didn't rise.

Of course, it's a little more complicated: world prices rose due to the oil embargo in 1973, but price increases in the US were suppressed by price controls. Then the Iran debacle raised them in 1979, and we started to see a response by 1985, but then prices fell again. Price feedback didn't happen again until 2005 when world prices started rising - then US lower 48 production started rising again (with a several year lag).

Could this just be random variation?

Well, we have to account for 2M bpd from Bakken-type oil shale. That level of production isn't a sure thing, but it's pretty likely. If it happens, that's definitely not going to fit into random variation of a Hubbert type bell-shaped curve.

Again, the increase from the Bakken (and other fields like it, like the Eagle Ford and the Niobrara) is not due to random variation in discovery. The Bakken increase is due to a change in technology/techniques/engineering - the field has been known for decades, but up to 400B barrels have been out of reach until lately (That's the total theoretical resource. The official estimate of recoverable oil was about .1% of that up to about 3 years ago, then it went to about 1%. Now we're seeing industry estimates of 24B being recoverable - a 6x increase over just 3 years ago).

A Hubbert Linearization of the Lower 48 (using only production data through 1970) showed estimated URR of about 200 Gb, through 1970 the Lower 48 had produced about 100 Gb. Doesn't that suggest that it's unlikely that the Lower 48 will produce much more than another 100GB?

Well, the Lower 48 produced 91.3 Gb from 1971 through 2011, and production is at 1.8Gb per year and rising. I'd say it's pretty clear we'll exceed 100 GB post-1970 by a wide margin.

Will these shale plays will make a really material difference?

The latest estimate is for about another 24 GB from the Bakken alone. "Production results for the Bakken formation in the Williston basin continue to improve with technological advances, prompting Continental Resources Inc. to estimate potentially recoverable reserves of 24 billion boe." http://www.ogj.com/index/article-display.articles.oil-gas-journal.volume-109.issue-23.general-interest.focus-unconventional-oil-gas-sliding-sleeve-fracs.html.html

The Eagle Ford is also important: The Eagle Ford is also important: "With the Eagle Ford Shale alone now expected to eventually deliver 750,000 to 800,000 b/d of oil, industry leaders repeated their growing enthusiasm Monday for a newfound focus on US oil plays over natural gas."

http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Oil/6162878

It seems to me that analysis of our historical experience leaves out two key things: technical change, and price feedback.

Much of our historical experience is based on periods where there wasn't a great deal of technical change, and on a field-by-field and country-by-country analysis, where depletion doesn't cause a price signal feedback. In our current situation we have permanently high prices, which is a new thing. As a result, US production is increasing, and that increase appears likely to continue for a while.

I wouldn't want US domestic drilling to distract from the important thing, which is kicking the addiction to oil - the more we do so, the better off we'll be, in many, many ways. OTOH, we have to be realistic: US production is looking less and less like a Hubbert peak shape, and on the whole that's probably good.

Is Jeremy Grantham right about Peak Everything?

Jeremy Grantham, co-founder of money manager GMO with $106 billion under management, has developed an interest in resource limitations as obstacles to economic growth. See his article on GMO's web site http://www.gmo.com/websitecontent/JGLetterALL_1Q11.pdf .

Grantham's analysis is almost entirely about Peak Oil, and I'd say it's spot on: The US will face reduced growth during a transition away from oil, and many poorer countries will be in deep trouble.

The idea that we face Peak Everything is unrealistic on it's face: most of our other resources, like sun, wind, uranium/thorium, iron (5% of Earth's crust), aluminum (8.1% of Earth's crust), silicon, carbon, (etc, etc) are effectively unlimited, and will be substituted for the small minority of non-fossil fuel commodities that truly face limits, like copper. It's not hard to find good ores for these things, and the energy needed is small. The harder part is building the facilities.

Oil and copper are important, and it will take quite a bit of work to wean ourselves from oil in particular, but it can and will be done.

He talks about the move away from the trend line being too large to be random - well, that kind of technical chart analysis is silly. We know the fundamentals of what happened...China happened. Just because China dramatically raised the price of iron ore, cement, gold and silver doesn't mean that iron ore or cement supplies face any kind of limit.

It's an old fashioned short term boom and bust commodities cycle: prices rise sharply because current production capacity is exceeded. The boom has little to do with long-term trends for things like iron and aluminum, and it will go bust when China can no longer sustain 50% of it's economy going into capital investment. They're close now, with a lot of underutilized real estate sitting around waiting for buyers/tenants that aren't coming any time soon. Japan did the same thing.

China is a lot more important than any other country, as far as I can tell - it's bigger than anyone besides India, and building much more. China is consuming more right now in the way of iron, cement, etc than it ever will in the future, in order to catch up. This will end abruptly, and it's hard to imagine how that can be a quiet event.

In January of 2008 his fund's assets were $157B.
http://www.financialarmageddon.com/2008/01/another-permabe.html

In October of 2008 Grantham was vindicated by the 2008 crash, and his fund's assets had shrunk to $120B. That's entirely understandable. But despite the bottoming and recovery of capital markets since then, his fund's assets shrank again, to $106B. He seems to be losing his touch...

http://www.businessweek.com/magazine/content/08_44/b4106048104130.htm

Is our current monetary system sustainable?

This is a very complicated topic. I've been thinking about it (and things related to it) for a long time, and I still don't know what to think. I'd be delighted to talk about it for quite a long time - it's important and interesting. Here's some of my thinking - let me know what you think!

Here are my thoughts at this moment:

I think that the last 60 years have been quite exceptional - a real golden age. Can it be sustained? I tend to think so, but there are certainly a lot of risks.

I think the great majority of economists think that "fiat" money is a much better way to manage an economy. If you look at the years 1800-1940, you see a lot of deep recessions, like the one from about 1870-1890, which appear to have been at least partly caused by the gold standard. I think that the "establishment" (central banks, governments, big private banks, most economists, etc) isn't even considering going back to it, and would fight it tooth and nail. I suspect they'll succeed at that fight.

The fact that gold is in limited supply guarantees that under a gold standard periodic deflations will happen, most of them very painful and recessionary. A "fiat" currency can be expanded along with the economy, and a small amount of inflation (maybe 2%) can be maintained to encourage people to keep their money out of mattresses.

Hyper inflations of fiat currencies certainly have happened in the past. The biggest example I know of, Weimar Germany, was caused not by government incompetence or avarice, but more or less by fundamentals: France was taking revenge for the reparations that followed the 1870 war by demanding huge reparations from Germany after WWI, and Germany blew up their currency rather than comply and be impoverished.

The conventional explanation for the large increase in M1 is that the velocity of money dropped dramatically, so that the overall money supply (which more or less depends on "velocity x bank deposits") didn't really expand. That seems to make sense to me. Ufortunately, velocity is very hard to measure, so I'd say that the Fed is navigating by the seat of their pants. I'd say some inflation in the next few years (roughly 3-4%) is a good possibility. On the other hand, wage earners have no leverage at all, so a wage-price inflationary spiral seems very unlikely.

The level of US debt depends on what happens to oil prices and imports. Will we be smart, and move ASAP to hybrids, extended range electric vehicles like the Volt, EVs like the Leaf? Will shale-oil (like the Bakken, not Green River) production expand? We can only hope. Oil imports have dropped by 25% in the last 3 years - if we can keep that up, the US will be much stronger economically.

Regulation of the financial markets is lax, and this laxness caused the Great Recession. I'm afraid we're likely to see future bubbles and blow ups, though I'm not sure where or when. If we could figure that out, we could be rich! On the other hand, we've survived an awful lot of bubbles in the past - see "This time is different - eight centuries of fiscal folly" for proof.

How much do batteries cost? - part 7.

I've been arguing for quite a while that battery costs, like the cost of any manufactured item, depend heavily on volumes. That means that any analysis of battery costs depends on the production volume that one assumes.

Here's an article that helps clarify that:

"One carmaker willing to share a number is Coda Automotive, a small California-based electric car startup. Dan Mosher, the company’s chief financial officer, also spoke at Electric Car 2.0. “The $375 price might be fiction, but it’s a fact that the costs are coming down quite dramatically. Today, we might still be around $1,000 to $1,200 per kilowatt-hour,” Mosher said. He expects the price to reach $375 per kilowatt-hour in the next five to 10 years.

Mosher cited advantages that Coda might have, because the company manufactures offshore (in China)—but that benefit pales to the advantage enjoyed by major carmakers. Nissan, by virtue of its joint venture with Japan’s NEC Corp., has decades of experience in mass-producing lithium ion batteries. The company is projecting first year global production of the Nissan Leaf at 50,000 units.

“Can somebody really build a vehicle where they pay $375 per kilowatt-hour in 2010, I would say that’s pushing it,” Duvall said. “What they may see is forward pricing and they know their 50,000th or 100,000th vehicle will have that pricing. There’s no physical reason, based on materials and price of production, why that can’t happen.”

See the rest of the article: http://www.plugincars.com/electric-car-battery-costs-don%E2%80%99t-believe-what-you-read.html

Resistance to Change: #7 in a Annoying Series

"Poor Exxon. They used to be the oil company that everybody loved to hate. This spawn of the Standard Oil breakup had it all: Obscene profits, the Exxon Valdez, a mean CEO who sneered at clean energy, blatant funding for climate deniers.

But now, the new ExxonMobil is just not that special anymore.

It turns out that all the big oil companies are buying elections, paying front-groups to spread lies about climate change and dumping their tiny investments in clean energy while continuing to put out soft-focus ads touting how green and socially responsible they are. And they just don’t seem to care that much about preventing oil spills either.

In these days of peak greed, you have to drill pretty deep in the oil patch to find the worst of the worst.

A real gusher

Well, after coming up with a bunch of dry holes, the environmental and government-reform movements seem to have found the activist equivalent of Old Spindletop: Charles and David Koch."

See http://transitionvoice.com/2011/02/more-reasons-to-hate-the-koch-brothers/

How much do batteries cost? - part 6

Battery costs, like the cost of any manufactured item, depend heavily on volumes.

We see that here:

""If (Tesla's battery structure) works, we won't have to wait for a breakthrough in battery technology to develop a relatively cheap electric vehicle," Executive Vice President Takeshi Uchiyamada, who heads Toyota's research and development, told Reuters in an interview at the Detroit auto show on Tuesday.

"It could be as low as one-third of the cost of batteries being developed by car makers, because (laptop) batteries are produced in massive volumes." Source

That 67% cost reduction includes a sophisticated liquid cooling and battery management system, and extensive internal thermal isolation, which should be at least as expensive as the Volt's battery systems, and rather more expensive than those of the much simpler Leaf systems.

The batteries being developed for vehicles should cost less than laptop batteries very soon, because it's much less expensive to manufacture larger batteries than the equivalent in the form of hundreds of tiny laptop batteries. EV volumes will grow to the point of economies of scale very quickly: if an EV like the Leaf uses the equivalent of 3,100 laptop batteries¹, it only takes 85,000 EVs², to equal the volume of about 260,000,000 laptops...



¹ the Tesla has 6,813 batteries for about 53kWh - that suggests about 3,100 for the 24kWh Leaf!
² The planned deliveries for the Volt and Leaf in 2011

Why isn't trucking moving faster to electric vehicles?

Companies with large local delivery operations, like Staples, UPS and others, are moving to electric trucks, but they're doing so very slowly, despite clear savings:

"The trucks, which have a top speed of about 50 mph and can carry 16,000 pounds, cost about $30,000 more than a diesel, but Staples expects to recover that expense in 3.3 years because of the savings inherent in the electric models, Mr. Payette said.

Staples said the annual maintenance cost of a diesel delivery truck is about $2,700 in most years, including oil, transmission fluid, filters and belts. For an electric truck—which has no transmission and needs no fluids, filters or belts—the cost is about $250."

http://online.wsj.com/article/SB10001424052748704584804575644773552573304.html?mod=googlenews_wsj

On the other hand, the volumes are very small:

"FedEx is using 19 all-electric vehicles in London, Paris and Los Angeles made by Modec of Great Britain and Navistar International Corp. FedEx Chief Executive Officer Fred Smith has been outspoken about his desire to see electric vehicles proliferate, in part to cut the U.S. dependence on imported oil."

Why so slowly?


One problem: achieving economies of scale. The manufacturer received a grant to help get past that hurdle:

"Bryan Hansel, Smith's CEO, said his company is on track to lower its costs enough to not raise prices after its federal grant is used up. "We don't think there is a need for ongoing support," Mr. Hansel said. "

In comparable production volumes, electric vehicles are much cheaper than ICE vehicles, both to manufacture (without the battery) and to maintain. The cost of the battery will be more than paid for with fuel savings, leaving the other savings as profit.

Note the short-term orientation, which makes any kind of innovation difficult:

"One impediment to wider adoption of electric trucks: few finance companies offer leases on them. That's because finance companies are unsure about how to value the lease "residual," a truck's worth after a few years of use. "

The leasing companies are risk-averse. The larger problem: the operating companies are risk-averse, which is why they're leasing in the first place:

"Many large companies, including Staples, prefer to lease trucks to avoid the large capital requirements of an outright purchase, Mr. Payette said."