By Chris Nelder
Posting in Energy
Energy columnist Chris Nelder reviews why unconventional oil pushes oil prices higher, and forecasts oil prices through 2014 and beyond.
Over the past several months, I have detailed the implications of the gradual shift from conventional to unconventional oil production, particularly its upward pressure on the cost of oil production. As it has been a little over three months since I presented my model for oil prices, this week I'd like to review what we know about unconventional oil, and offer an outlook on oil prices for the coming years.
The unconventional non-solution
First, we know that tight oil production, like that in the Bakken Formation of North Dakota, is a treadmill. The constant drumbeat of highly-placed editorials about incipient U.S. energy independence is strictly political fodder, with no sound basis in data. Yes, in theory, it's possible that we could double the output from the Canadian tar sands and the deepwater Gulf of Mexico, quintuple the number of wells that have been sunk in the Bakken so far, and pull off some biofuel miracles. But local resistance to that drilling program will be fierce in some areas, and its cost will eventually prove prohibitive. And it won't end there; to maintain that level of output, we'll have to keep drilling like hell, with increasing risks to the environment and public tranquility.
In reality, despite the technological achievements that have enabled production from these difficult resources, the world is losing the race against the depletion of mature conventional oil fields. And the pace of that depletion is accelerating: it's now an estimated 5 to 6 percent per year for OPEC, and 8 to 9 percent for non-OPEC. Unconventional oil cannot compensate for a drag of that magnitude for very long.
Further, even if the U.S. were to follow the path to so-called energy independence, it would likely cut the lifespan of our remaining oil in half, leaving us to struggle for decades afterward with greatly diminished domestic production at the very time when global oil exports are declining fastest and becoming intolerably expensive.
We also know that the shift to unconventional oil has moved up the floor of oil prices to around $85 a barrel, which I estimated to be the marginal average cost of profitable production worldwide. A report from Bernstein Research, covered in May by the ever-capable Kate Mackenzie for the Financial Times, suggested that the real floor was even higher at around $92 a barrel in 2011, on its way to $100 a barrel this year. This fits with the stated objective of OPEC members to defend a $100 price target.
But there is also a ceiling around $125 a barrel for the global Brent benchmark (roughly equivalent to $105 for the U.S. benchmark, West Texas Intermediate). This is why world oil prices have been bouncing around the "narrow ledge" between that floor and ceiling since the beginning of 2011, as shown in the following chart.
In short, unconventional oil doesn't scale; it's expensive, and getting more expensive every year; and its risks are increasing.
Finally, we know that we're losing the race for vehicle efficiency, and probably will lose it forever. Emerging markets, particularly in Asia, have been outbidding the U.S. and Europe for oil since 2005, exerting a constant upward pressure on oil prices even as demand from the developed world continues to decline. Our response to this has not been a materially significant shift to greater vehicle efficiency, but rather a gradual shift from personal to public transportation, shrinking economic activity, and the "nearshoring" of manufacturing.
All of these factors augur higher oil prices as we move into the future.
Oil prices for the next two years
When oil supply surpassed demand in the first quarter of this year for the first time since 2005 (see chart at top), some observers took it as an indication that peak oil fears had been laid to rest and that we were on our way to a new age of oil abundance.
They are wrong.
The simpler and more obvious explanation is that the narrow ledge of oil prices, shown between $105 and $125 (for Brent) in dotted red lines on the chart, is very much in control. As prices edged toward the ceiling in mid-2011, accompanied by the effects of the Arab Spring, demand and supply fell. But sustained triple-digit prices for the nearly 18 months since the beginning of 2011 gradually brought more supply to market, a trend which continues today. However, those same high prices once again began to kill demand, which has been falling in recent months, and prices are now falling again. As of this writing, Brent spot is trading for $97, and WTI spot is at $83. Spare capacity has continued to decline over the past three months, and is now nearly at the 2.5 percent threshold I discussed in February, but I expect declining demand and growing supply to increase spare capacity again and avert a price spike in the near term.
[A few notes about this chart: I have elected to show this data in quarterly terms for simplicity of presentation, and to highlight the crossover of supply and demand. Supply and demand data is from the IEA Oil Market Report, which includes biofuels and a liberal inclusion of natural gas liquids. Price data is from EIA. On a daily basis, Brent prices were above $120 from the middle of February through the middle of April, and exceeded $125 for 17 days from late February through early April. The second quarter is not yet finished and the most recent monthly Brent price data available from the EIA is for April, so I have averaged the April price with weekly data for May and the first week of June to plot the Q2 price, shown in gray on the chart. Brent stayed steadily above $105 from February of 2011 to the last week of May 2012.]
As oil prices are now below the price floor, the next major move should be upward, as demand rebounds in response to the lower price. Supply will remain above 90 million barrels per day (mbpd) if Brent rises above $105 within the next month or two, but if it does not, then supply will begin to fall back toward 89 (mbpd) again, and the risk of supply destruction will increase. Supply cannot continue to increase without prices remaining perilously close to the ceiling of demand destruction. It is very likely that demand will again exceed supply before the end of the year.
On the fundamentals, I expect this rangebound behavior through roughly the end of 2014. The price will bounce between the floor and ceiling of the narrow ledge, causing supply and demand to vie for the lead. Trading that range will be easy, but not terribly profitable, and speculators may begin to focus their attention elsewhere.
In fact, as reported by John Kemp for CNBC on Monday this week, Goldman Sachs believes the recent selloff was overdone. Speculative traders betting on rising prices left the market in droves last month, and "the market is again primed to rally hard" now, with a tighter balance between supply and demand expected in the second half of the year. This seems reasonable. (Sadly, it appears the Goldman analysts also recommended that their clients buy U.S. oil futures at $107.55 in February, right at the top of the range for WTI. If they had understood the narrow ledge, they would have recommended selling at that point.)
Of course, there is more to the oil trade than fundamentals.
The euro has been an air ball for over nine months, and whether it will break up, or be rescued through some sort of heroic intervention, remains to be seen. My bet is on a rescue.
OPEC could announce production cuts at their meeting later this week, which would be bullish for prices. But, despite conflicting reports this week about what Saudi Arabia's oil minister, Ali al-Naimi, said or meant to say in recent press interviews, my bet is that the kingdom fears demand destruction more than supply destruction and will maintain output at its current high levels. I don't believe the rest of the OPEC members will have substantive influence.
A fresh round of tensions over the standoff on Iran's nuclear ambitions, or any number of other developments in Middle Eastern politics, could also drive prices higher. But I expect those risks to remain relatively muted over the next year. The consequences of letting things get out of hand are simply too great. And no, I don't think Israel will bomb Iran.
Under the heading "A Foggy Horizon," the IEA highlighted "the complexities faced by those trying to peer through the murk that shrouds any outlook for the second half of the year" in their May 11 Oil Market Report. I agree that the geopolitical uncertainty is high, and I agree that "there is no room for complacency" at this point. The ledge is narrow indeed, and it wouldn't take much to push the global supply and balance off it. At the end of that discussion, they wondered rhetorically, "Who'd be a forecaster?" Fair enough; if your job doesn't depend on seeing through the murk, then there's little to be gained from taking that risk. Better to leave the bold calls to the energy futurists.
Outlook for 2015 and beyond
I may be right and I may be wrong about these calls, but forecasting a dull trading range for oil prices over the next two years is relatively easy, because it's supported by recent data and fundamentals. Much harder is forecasting what prices will do after 2014.
As my regular readers know, I expect spare capacity to drop to critically low levels in late 2014/early 2015 as depletion finally overwhelms our efforts to fill the gap with unconventional oil, kicking off a long era of harsh volatility in both oil prices and the global economy as a whole. And I am not alone in this expectation; among others, the IEA official who was responsible for developing their petroleum outlook scenarios from 2006 to 2009, Olivier Rech, also sees a turning point around that time.
An interesting "working paper" prepared for the IMF in May (but expressly identified as representing the views of the authors and not those of the IMF), attempted to empirically quantify the key question of how the battle between geological depletion and technological innovation will play out. The authors concluded that "the future will not be easy," after their model showed that "small further increases in world oil production comes at the expense of a near doubling, permanently, of real oil prices over the coming decade." They "suspect that there must be a pain barrier, a level of oil prices above which the effects on GDP becomes nonlinear," but do not attempt to quantify it.
This conclusion comports with some of the academic research on EROI I reviewed in February. I obtained similar results after playing with a simplified EROI spreadsheet published by fund manager Stephen Johnston last month, which lets you discover the price effects of substituting low-EROI unconventional oil for high-EROI conventional oil. With his default, conservative assumptions, oil prices would rise by 23 percent by 2025, but after plugging in assumptions that I consider more likely, I got from 100 to 150 percent price increases.
The history of oil prices since 2007 suggests that a permanent doubling of oil prices, while possible in theory, are not possible in reality. We have been bumping against the pain barrier since the first oil price spike in 2008. As we substitute more and more unconventional oil for depleting conventional oil, the consequence will not be sustained oil prices at double current levels, but the shrinking of the global economy, or, as I have called it previously, the Great Contraction. Oil prices could actually drift lower, not higher, as we fall into the deflationary vortex.
So enjoy the relative stability of the next two years, and take advantage of the narrow ledge concept to trade oil profitably as it bounces between the price floor and ceiling. Just be aware that a large waterfall awaits at the end of that quiet stretch of river, and be ready to head for shore before you get there.
Jun 12, 2012
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"So enjoy the relative stability of the next two years, and take advantage of the narrow ledge concept to trade oil profitably as it bounces between the price floor and ceiling." Yeah, right. Trade profitability based on advice from Chris Nelder. (eyeroll) The oil market is really, really, hard to trade. Really smart people that know a lot about oil still lose their shirts trading oil. All the time. I'd love to see Chris Nelder take his own advice here, and attempt to "trade oil profitably ": Chris would look kind of cute wearing a wooden barrell holding a "will blog for food" signs. Oh wait, he already is holding one of those signs. He's just wearing his daddies old suit. Carry on, then.
Chris, please document the basis of your floor price for oil production costs. We apparently talk to different people in the oil industry. The people I talk to think that existing well land based production cost avgs. are in $40-60/barrel range. This range conservatively agrees with market price lows over the past 15 years where in much lower prices were breached by the market on several occasions - indicating actual production costs were much lower. I'm not arguing about the finite nature of oil reserves, on the other hand artificial "commodity shortage crises" that has been a widely used marketing tool raise commodity prices since the 70s. It seems logical that particularly ME oil has a large amount of "production cost" padding that relate more to the royal's budgets and what it takes to keep the lid on ME social conflicts - than actually oil production costs. While you might argue that pricing abuse is a separate problem than oil/energy depletion - money that pads wealthy oil execs. and birth-right ME royals is money that isn't going into serious research to develop technologies to economically replace civilization critical resources. No one seems to get that peak oil is confluent with peak food for example. I'm far more concerned about producing food for the worlds growing population than I am about running out of fuel for private transportation.
The situation in the main Eurozone members is becoming so economically/socially tense that it is impossible to say where things will stand 2 yrs from now. Seems your model is not taking into account the current economic deleveraging the banking system is forcing on Eurozone economies which could freeze/stagnate energy demand even further. These feedbacks alone can make your analysis look very flawed just 12months from now.
These pieces are always insightful & appreciated. I wonder if the short term price of oil may be driven down by applying unconventional extraction technologies without regard to damage to the environment. Not here in North America, but in shale formations elsewhere.
Absolutely great article. You have done your homework and it shows up nicely. Thank you for your efforts.
I have to agree with Chris analysis in its entirety. I don't focus on the "Mickey Mouse" media hype. If you are still unaware that the US media message is controlled and owned by the Big 6 you are in sheeple dreamland. Keep the masses calm. Evrything's gonna be alright. That's Chris' message. The Solyndra SNAFU is a prime example of mismanagement of taxpayer monies and the inherent virus mortality embedded with the acquisition, use and expenditure of the funds. I'll bet dollars to donuts that the top 1% in the Solyndra management is not on foodstamps today. The piper calls the tune if he loans out the money. Ask yourself why the US government would lay import-tarif-seige upon (cheaper to the end-consumer) solar panels from China. If our government was future cognizant in its actions they would be subsidizing homeowners for a complete OFF-GRID model of power generation for the nation. 180 Million batteries in series-parallel. Arizona would be supplying the West Coast with power as we speak. We will NEVER run out of oil because we will NEVER harvest it all. I say that not as a believer in the Kuntsler creamy, nougat center school of thought- but rather in realization of the technological impossibility required therein. When Oil gets too pricey to afford: - EROEI will have the last laugh - Technology will not come to our rescue - Our government will not save us. We will simplify, be happier and maybe get a little more fishin' in! God Bless.
I have listened to a lot of popular reports about the recent increase in oil production. I have NEVER seen "highly-placed editorials about incipient U.S. energy independence", not even in "The Wall Street Journal" or on Fox News. If you have, please cite them. Nobody of national repute and expertise has ever stated that the US will be in a position where it won't need to import oil, for example. What they've said is that we've been given a reprieve from massive disruptions in our economy. Nobody disputes that one day we will have to find something else. That said, I think you are right about the short-term price ranges. Long-term is still an open question. I still don't know why you get so excited that oil is becoming harder to find or that we are running out of it. This is no different than iron, copper, gold, or any other resource that has a finite supply. The quality of iron ores today, for example, is vastly inferior to what we had just a few decades ago, and yet the world is still producing record amounts of iron and steel. How do your models of scarcity deal with that? Back in the '40s, the US reserves of oil were around 25 billion barrels, the same as the official number today. In between we produced hundreds of billions of barrels. Why was that? It was because we had vast improvements in discovery and drilling technologies that unlocked huge amounts of oil we didn't even know existed back then. The evidence of the past few years is that we are nowhere near the end of oil drilling technology. But gradually rising prices over the next few decades would be a good thing. It will slowly force the market to become more efficient and give it time to develop new technologies. It's clear from the failures of Solyndra and A123 that the alternative technologies we have today just do not work despite massive government subsidies. So do you want us to stop exploring new oil production technologies today so that we have huge shortages now instead of decades from now when we might be better prepared? What's the logic of that?
"The euro has been an air ball for over nine months, and whether it will break up, or be rescued through some sort of heroic intervention, remains to be seen. My bet is on a rescue." I'd bet there is a rescue, and another rescue, and another.......right up until things come to a head, and the half life of those bailouts is measured in hours, not days or weeks. A rescue does nothing to address the underlying flaw of the Euro, where they have a currency union without a collective means of rebalancing the disparities between them. Like the United States, they share a single currency, but critically unlike the United States, there is no redistribution of funds to balance out the differences between winners and losers. It's as if the feds told Mississippi, with its 22.4% poverty rate and 8.7% unemployment rate, that the solution to its economic problem was austerity. And that if it needed more money, it would have to be in the form of loans -- because Massachusetts, Connecticut and New Hampshire decided that it had enough of Mississippi's collective moral turpitude.
If you look at the links I've provided here and in my previous articles discussing the price floor, you will see that I have cited my sources for those estimates and discussed some of the important details that go into them: offshore or onshore, conventional or unconventional, production costs from old fields where all the capital costs have long been recovered vs. a brand-new barrel of production capacity from a new oil province like the Arctic, and so on. Obviously, there is a huge range of costs here and it's not easy to just pick one number for a global floor price. Conversely, you have not cited your sources or other important details, like where this "existing well land based production" is. The U.S.? Saudi Arabia? There's a huge difference between the lifting costs (only) for old wells on land in Saudi Arabia, for example, and the all-in costs for, say, a new deepwater well in the Gulf of Mexico or a new offshore heavy oil project in Venezuela. It's also important to recognize that around two-thirds of the world's old land-based oil fields are into their decline years, and their production must now be replaced by new fields with very different cost structures. For my model, I have reviewed many research papers and price studies to try to guesstimate one price floor number for the entire world, and that number denotes, as I have tried to explain, the full average cost of bringing online a new, marginal barrel of production capacity anywhere in the world, including land costs, financing costs, the willingness of financiers to back a new project, well drilling, production costs, maintenance costs, and so on. I don't know what the anecdotal $40-60 range you cite incorporates, but I am sure that it does not include all of those factors and apply anywhere in the world. A helpful chart in a recent Byron King post shows the widely different price ranges for production breakeven, commercially attractive, and budget breakeven costs: http://dailyreckoning.com/whats-the-deal-with-oil-prices/ Note that those numbers are denoted in WTI terms. So there is a lot of complex detail here and it's important to explain what we're talking about. Finally I will note that the world entered a new pricing regime when conventional crude production plateaued at the end of 2004 and we began turning to unconventionals in earnest. So I tend to regard pricing data prior to 2005 as more or less irrelevant now.
Mr. biocepts, I just want to say that I get your concerns. The more that I study the big picture, the more that my thoughts circle back to the basics of survival in a World of diminishing resources, and food is perhaps the most basic. I think that we can assume that the first fossil fuel use that will be limited and rationed, before agriculture, is personal transportation. How else can they keep a lid on? As the Arab Spring proved, social unrest is fueled by an empty belly. I think that we can also assume, though I'm unsure of the time frame, that the limitations on personal transport won't be near enough, and that the devastation of industrial agriculture will then become more than apparent. It'll be more gradual, and, while we are now all Greeks, we will eventually all become Cubans as we reach our own depletion "Special Period." Fortunately, the Cubans proved that this can be overcome in a decade of transition to organics and sustainability, but most of us may be riding rickety, hard to pedal, Chinese bikes until we get it done. (grin)
Well, as I've said, I think there will be some sort of Euro-style QE/rescue, which will buoy prices. Should we see a continued stagnation/freeze scenario, then I would expect that to result in some demand destruction, but it probably wouldn't be significant enough to materially affect oil prices. Europe's oil demand has been falling at roughly the same pace as the US's since 2005, and that lost demand has been more than made up for by Asia, which I expect to continue to be the case. In data terms: from 2010 to 2011, when Europe's deleveraging and austerity began to take place, their demand only fell 98,000 barrels per day (0.65%) according to EIA. That's much smaller than their demand loss from 2006-7 (274,000 bpd), 2008-9 (729,000 bpd), and 2009-10 (230,000 bpd). Finally, the whole of Europe accounts for just 17% of world demand. So no, I don't think this presents a serious challenge to my model. Only a true euro collapse would break my model.
Marcus, Let's hope that there are a few fish left to catch, and that we aren't just setting on the open sewer bank, enjoying the sun filtered through the smog. (grin)
Marcus, "Keep the masses calm," but pass a Constitutionally devastating NDAA, to be ready for the not so distant day when the masses can't be kept in their place and must be kept in the prison economy. We are the masses, are we not. I doubt if anyone posting here is 1%, even when they parrot 1% policies.
Zackers wrote, "But gradually rising prices over the next few decades would be a good thing. It will slowly force the market to become more efficient and give it time to develop new technologies." You're quite right, if such a lovely eventuality had a chance of happening in our boom and bust, anything but free, market. What in the history of the last 30-40 years leads you to think that diminishing resources, particularly the oil lynch pin of all civilization's resources, will be accompanied by anything remotely gradual? Chris doesn't beat around the bush. He shows clearly that the results of now will be extreme price and economic volatility as we bang our economy's head against a lowering oil ceiling time and time again in just a few short years. And what's this about "massive government subsidies" for renewable alternatives when the facts in absolute dollars are that the real massive government subsidies go to the inevitiable fossil fuel losers that have all the money and clout for now? What's the logic of that? Do you really want to live in a country poked full of leaking toxic holes, scraped clean of green and topography with poisoned, sterile soils and waters? Not me! I'll take more than a little sacrifice to avoid that.
Zackers, I've provided numerous links to articles touting our incipient energy independence and the cancellation of our imports in previous articles, so it seemed redundant to do so here. Once again, here is a small sample: http://www.foxbusiness.com/news/2012/06/13/conoco-ceo-sees-north-america-energy-self-reliant-in-2025/ http://www.nytimes.com/2012/03/23/business/energy-environment/inching-toward-energy-independence-in-america.html?_r=2&pagewanted=all http://online.wsj.com/article/SB10001424052702304459804577285972222946812.html http://www.firstenercastfinancial.com/news/story/47881-raymond-james-projects-us-energy-independence-early-2020 http://www.nytimes.com/2012/06/10/opinion/sunday/the-new-politics-of-energy.html?_r=1&pagewanted=all http://www.forbes.com/sites/forbesinsights/2012/04/18/u-s-energy-independence-in-15-years/ http://www.npr.org/2012/03/07/148036966/is-u-s-energy-independence-finally-within-reach Or just do a Google search for "energy independence" over the past year.
Mississippi's debt to GDP ratio is nothing like Greece or Spain. They haven't been trying to borrow their way to prosperity with nothing to show for it.
When small start-up companies such as Solyndra get $525 million to build manufacturing plants, that's a massive subsidy. It's similar for A123 and Fisker. Oil companies and indeed any other industry gets nothing like that in proportion. And when you look at the actual numbers, the supposed subsidies to oil companies amounts to little more to tax deductions for capital equipment and business expenses that every other business in America gets. I don't know about you, but I've been around the last 30 to 40 years (actually a bit longer). In real terms the price of gasoline has been gradually rising once you factor out the price shocks caused by political events such as Middle East wars. Like any crucial commodity such as food, oil has price swings but always tends towards a mean. We are seeing that today.
I've looked at the articles, and there's nothing there that says one day the US will become energy independent. For example, from the first article "the country already has no need to import any natural gas." That's true. Plans to build LNG terminals here to import gas were abandoned years ago. "North America will become an exporter of [liquefied natural gas] in the near future," That's also true. Deals are being done now with Japan, which is switching from nuclear to gas following the earthquake. It costs us about $12 per million BTUs to deliver LNG to Japan, and they are willing to pay $16 for it. That $4 profit is more than the $2.50 before costs producers get in the US, so it will happen. No exaggeration in this article. From the second article "U.S. Inches Toward Goal of Energy Independence" there are no claims the US will ever actually achieve energy independence. For example, There is no question that many national security policy makers will believe they have much more flexibility and will think about the world differently if the United States is importing a lot less oil From the third (WSJ) article "The United States has become the fastest-growing oil and gas producer in the world, and it is likely to remain so for the rest of this decade and into the 2020s." It's true about the past decade, and could easily be true going forward. In fact our natural gas production is so large that producers have shut down fields because it's no longer profitable unless prices rise again. But that statement does not say we will become energy independent. I don't know how anybody could read that into similar statements. If this is your idea of wild hyperbole or gross exaggeration, then the arguments you make here qualify on the other side. What I am seeing are gross misstatements about oil and gas drilling starting to appear in the popular culture. For example, everybody "believes" that fracing liquids seep up from deep below to pollute the groundwater. This was even stated as fact in a recent "Rizzoli & Isles". Except that has never been proven. In a recent study by the EPA of a often-cited Wyoming field, they found plenty of evidence that fracing fluids seeped into the groundwater from a poorly sealed well and shallow holding ponds. They could find absolutely no proof that fracing fluids were seeping up thousands of feet through the shale. People believe that fracing causes tap water to burn. In fact, reports of "burning springs" that could be ignited go back to at least the time of Washington (see http://www.uky.edu/KGS/emsweb/history/predrake.htm and http://www.wvexp.com/index.php/Burning_Springs,_West_Virginia ).
Mississippi receives about $2.00 of federal spending for every $1.00 of Federal taxes paid. How would they be doing if they didn't get all of that Federal money? http://visualizingeconomics.com/2010/02/17/federal-taxes-paidreceived-for-each-state/
Zackers, What you are saying comes down to this. It is incumbent on humanity to continue poking, skinning, slashing, burning, polluting and spreading pollutants on the Eaarth, who's ecosphere is our most basic nutrient, and the basic nutrient of everything that lives on this sphere. All this for the sake of the freedom to accumulate fiat money, that is the basis of our rapacious economy, an economy that gives no account or value to our basic nutrients. What an utter fool's quest, with any thought for the future lost to any morality or ethics. Your world, without empathetic design based on nature's sustainability, doesn't interest me. If you have your way, we might as well either swim in the fiat $$$ or go fly a kite, for all the value that any of our endeavor may have. I grew up on a farm in the 50's and early 60's when our soils still had worms and microflora in them, our waters of all sorts still had fish in them, there was at least enough forests left for woodlots, there were places to play that weren't paved over, and when I was a tyke we still used draft horses along with the one small tractor and very little chemical fertilizer. All that is gone when it didn't have to go entirely, and all because of the Earl Butz's of the world for which big and destructive was the only ethic of economics, your ethics when applied to energy exploitation/extraction. It has proven to be a very negative ethic, and you want it to continue at all speed until all the crucial resources are used up or too expensive to use. Save some for those yet to come or be reviled rightfully for eternity. Although I didn't know a thing about it at the time, the Club of Rome was very right and only off by a few decades, at very most half a century. That's a whole lot better than being off like rancid butter now.
Solyndra was a bad bet even before the loan was made. The evidence that the company was failing was present even before the loan was made -- the Energy Department just chose to ignore it. The problem with these loans is that either every little start-up should get hundreds of millions of dollars or else somebody has to judge these companies based on merit. Unfortunately, not even the private sector is very good at that. In Silicon Valley the vast majority of venture capital investments strike out. How could somebody in government be any better at it? The track record of these investments speak for themselves. They can't all be the result of bad timing. The "depletion allowance subsidy" is simply the oil industry's version of writing down capital assets that every industry gets. A company buys a piece of equipment, which has some value, and carries it on its books as an asset. The equipment wears out, and it's no longer worth what it was before. So they get to write that very real loss off even as that piece of equipment helps the company make a profit. Similarly, an oil company buys the rights to drill in a field, and the field has some value because of the oil or natural gas there. This field is carried on its books as an asset. As the oil or natural gas is extracted, the value of the field becomes less and the company gets to write it down even as they sell the oil or natural gas to make a profit. How is that a horrible crime? Why should oil companies be denied the same rights as other companies? This is all basic accounting 101. The only reason it's an issue is because in the eyes of greens somehow a dollar of profit made at Exxon is more evil than a dollar of profit made at Apple. You ignore the fact that *everything* is finite. Let's pretend for the moment that the Sun is infinite. So what? The materials used to extract energy from the Sun here on earth certainly are finite. There have been numerous discussions of rare earth shortages, lithium shortages, and even copper and other metal shortages to transmit power. It's a basic rule of economics that no matter what you do *something* will always be in short supply relative to other inputs. So economics (and life really) is all about managing finite supplies of things. I grew up in the '60s. Back then we were told that shortages of food and basic materials such as iron would turn the world into a nightmarish polluted hell by 2000. People would literally be starving. Look up the "Club of Rome" if you don't believe me. Instead 2000 came along and the world was never more prosperous. For the first time in history there was not mass starvation because of lack of food. So while I do worry that we may hit a roadblock one day, I see no reason to panic about it.
Zackers, It's interesting to see how you completely ignore the ever growing negative externalities of the ever growing difficulty of fossil fuel extraction to try to keep pace with an ever growing need in the relative absence of renewable energy resources. You dump on the Solydra loan which went south because of very rapidly changing economic factors that no one could have foreseen, and were a positive development. Yet you ignore the massive century long pollution of the gulf because just one well went haywire, or the contaminated ground water in large areas when just one fracked well messes up. Sure, let's go ahead and drill half a million more fracked wells in the next decade. It's just too bad if 1% or 10% of those wells have problems that rebound for a century or two and negatively effect a large percentage of our country's natural flora. Economic gigantism is the only value worth considering. Maybe not! You ignore the depletion allowance subsidy to make a bogus point. It's kinda hard to extend the depletion allowance to wind, solar, tides and geothermal because oops, these resources don't deplete in any human time frame. You completely ignore the finiteness of fossil fuels and the immense task of getting off the merry-go-round, if we don't use them to make the infrastructure change to renewables, rather than frittering them away on unnecessary GDP stuff. Chris uses an Arab joke in a chapter heading of "Profit from the Peak," that I will never forget. Let's see how close I can come to how it went: Two fossil fuel rich, old Arabs are sipping strong coffee in an outdoor cafe in the early morning before the heat of the day. One says to the other, "Ah, what a world we live in. My father road a camel, I drive a Mercedes, my son flies a jet plane, his son will drive a used Mercedes, and his grandson will ride a camel." I'm not too fond of the idea of going back to riding a camel or horse except for leisure. I'd much prefer to jockey a 200 lb. electric vehicle that will carry me and another, or me and considerable cargo at half the speed of today, but 4 times the speed of a horse. This vehicle could easily sip the diffuse energy of reasonable renewable energy, but not if we wait until we MUST do it. The sacrifices we must make are slower, less powerful and much smaller. But it's not, if we act in time, a sacrifice in quality of life, rather just the opposite, as we live closer to , and in harmony with the natural World that sustains our basic needs, if our Eaarth has not been devastated by fossil fuel extraction/exploitation.
John, There's the crux of the matter, that neither stimulus nor austerity, can deal with diminishing resources to "solve" the problem. It takes an about face and an entirely new paradigm to begin to deal with the problem, and yes, a large degree of sacrifice. Not a single politician, right, left or otherwise, and very few economists will admit to this. So we try to stumble on with the status quo as everything about our lives worsens, for all but the tiny few losers, who think that they are winners.
The amount spent by the cumulative receiving states far exceeds the amount paid by the cumulative states. That is called a deficit. That is unsustainable math no matter how you look at it. If you look at the cost of operating the federal government, the actual useful money received back to the states SHOULD BE something like 40 percent of the income taxes paid by the states.