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Is fast crash becoming more likely?

General discussions of the systemic, societal and civilisational effects of depletion.

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Re: Is fast crash becoming more likely?

Unread postby donstewart » Sat 12 Aug 2017, 07:45:24

Financial Measurement; Holistic Management; Biology vs. Capitalism

There are a lot of rancorous disputes here about ‘how oil companies are doing’. I will try to shed a little light.

First, let’s detour and take a look at railroads.
In finance, the operating ratio is a company's operating expenses as a percentage of revenue. This financial ratio is most commonly used for industries which require a large percentage of revenues to maintain operations, such as railroads.

So we can see that a reasonable way to manage a railroad is for the senior management, which is responsible for the company as a totality, to give responsibility for managing the operating ratio to a single executive. It doesn’t mean that there aren’t other costs which are important, such as depreciation or taxes or corporate operations. It is just a method for dividing up responsibility in a sensible way which permits finite humans to manage a complex operation.

A different way of managing was used by a very large company I used to work for. That company divided itself into Business Units, which were, at least theoretically, stand alone businesses. The catch was that there was a lot of corporate overhead which had to be allocated to the Business Units. For example, the Business Units got their money from the Headquarters, which sold stocks and bonds to investors. The cost of the stocks and bonds had to be allocated, since the Headquarters did not produce any revenue itself.

A couple of years ago, when Rex Tillerson was still at Exxon-Mobil, he was asked about writing down certain assets. He said that Exxon-Mobil did not write down assets. It held the individual unit managers fully responsible for the investments they had made. (Of course, Exxon-Mobil did end up writing down a few billion dollars of assets, eventually.) I am not intimately familiar with Exxon-Mobil’s management theory, but it sounds more like the ‘fully allocated cost’ model which was used by the company I worked for.

When I was studying for my MBA (a long time ago), we had a lot of discussion about whether non-cash costs such as depreciation should be used in the financial measure of a manufacturing executives performance. On the one hand, the current executive probably had nothing to do with selecting most of the assets being depreciated, and so including them doesn’t tell us much about the executive’s performance (very important in terms of executive bonuses). But on the other hand, depreciation represents a real cost which was incurred by the corporation at some point in the past. Corporations which cannot consistently generate enough money to pay back initial investments tend not to survive.

Going back to a railroad, a historical measure was that the operating ratio should not exceed 70 percent. In a fully allocated model, the Chief Operating Officer would be required to generate achieve a 100/ 70 margin on operations. In the Exxon-Mobil model, each unit would be required to generate enough margin to pay not only for producing wells but also the duds which have been abandoned. In short, the total corporation must be managed to cover all of the financial cost, somehow.

Alan Savory, the elderly wildlife biologist who figured out how to use domesticated cows to restore deserts, promotes a concept called Holistic Management. It is most easily thought of as a way to manage a family business, or Planet Earth. That is, we envision a future where the family farm is still in operation 5 generations from now, is continually improving in terms of soil and water health, and provides a stable economic base for the family with meaningful work. All day to day decisions are subjected to the family’s vision for what it is they are trying to accomplish. I think it is a pretty safe assumption that most financially driven operations don’t think this way at all.

The IMF recently published a study indicating that society is subsidizing fossil fuels to the tune of 4 or 5 trillion dollars per year. I haven’t looked at the details of the study, but the economists involved will try to put a price on the damage being done by the fossil fuels in terms of air and water pollution and carbon dioxide in the air. Such studies always run up against issues such as figuring out how many dollars should be assigned to the quarter of a billion deaths which are inferred statistically. Based on observations of human behavior, a quarter of a billion people killed by the fossil fuel industries is less important than a hundred people killed by terrorists. And financially driven corporations, of course, don’t think this way at all.

Which brings us down to the divide between Biology and Financial Capitalism. In Financial Capitalism all that matters is that one’s marketable assets increase and are liquid. Liquidity means I can get out if things start going badly. In the stock market swoon a couple of days ago, 19 of the top 20 rich people in the world lost money. Only Carlos Slim in Mexico made money. Perhaps Slim was short the market, and so took money from the other 19. But all of the 20 perceive that they could ‘cash in’ if they wanted to. Biology doesn’t work that way. Biology works in terms of food webs and networks and global nutrient cycling and gaian systems of positive and negative feedback loops. The ETP model, to my understanding, adopts a sort of biological view. The ‘cost’ of oil includes finding and producing its replacement.

If a biologist is looking at the energy cost to sustain a beaver colony, the biologist does not look at the food requirements for a single beaver. The biologist will, first, look at the requirements to keep the beaver colony healthy and thriving through multiple generations. The biologist will also look at the requirements for fresh saplings, and how much energy is required to provide the saplings. Which leads into a complex world of soil microbes and the soil food web and photosynthesis.

The ETP model, to my understanding, is far more like the biologist trying to estimate the energy required to keep the beaver colony thriving than it is to reductionist measures such as the railroad operating ratio. The ETP model is trying to assess the prospects for Industrial Civilization.

An enormous amount of energy is wasted on this blog by failure to distinguish the apples and the oranges….Don Stewart
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Re: Is fast crash becoming more likely?

Unread postby rockdoc123 » Sat 12 Aug 2017, 10:34:08

I do find it interesting that prices never went down to a level that stopped drilling and fracking, let alone stopped conventional drilling. Sure a lot of drilling stopped and a lot of marginal drilling ended, but even at the nadir fracking was still going on with hundreds of wells being completed every month
.

There are a lot of moving parts and no one size fits all. When prices bottomed out there was still a lot of operators who had hedges going out two years that protected them. Along with that incentive there was the issue that believing the bottom was at hand and prices would rise again a number of operators increased production in order to increase overall cashflow which was seen as a short term solution to avoid selling assets, mass layoffs, renegotiating royalties etc. I've been through a lot of ups and downs in the industry and what is always the case is that companies respond to their changing environment. When prices rise they seek out new opportunities to grow their business and when prices fall they look at every way in which costs can be cut. Something that few talk about is the level to which drilling and completion costs dropped since the price crash. Some of this was due to a significant drop in service costs (in order to stay competitive service companies dropped their fees by 30 - 40%) but there was also a component of cost cutting through improved field management. As well, improvements in completion technology and rotary steering have allowed for larger initial production rates and subsequent larger EUR/well in certain areas. As a consequence average breakeven costs in most of the shale basins dropped considerably. Of course as price recovers and service company fees increase (they have to in order to keep this sector healthy) those average breakeven costs will rise somewhat.
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Re: Is fast crash becoming more likely?

Unread postby Yoshua » Sat 12 Aug 2017, 10:48:26

Trump just went all in.

https://twitter.com/zerohedge/status/896364881024364545

"Trade war with China starts Monday."
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Re: Is fast crash becoming more likely?

Unread postby onlooker » Sat 12 Aug 2017, 11:01:15

Yoshua wrote:Trump just went all in.

https://twitter.com/zerohedge/status/896364881024364545

"Trade war with China starts Monday."

Well it looks like now the bifurcation of the West and the East is at an advanced stage
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Re: Is fast crash becoming more likely?

Unread postby rockdoc123 » Sat 12 Aug 2017, 11:24:38

"Trade war with China starts Monday."


according to news outlets a bit more credible than zerohedge the US will start to review Chinese infringement on intellectual property starting Monday. This was planned to happen weeks ago but was postponed due to the issues with North Korea.
There is no trade war, in fact the US hasn't done anything other than complain about possible infringement and the Chinese have responded that they would like to see negotiations to strengthen trade relationships and they respect intellectual property rights. This is normal back and forth amongst trading partners and not a lot different than what is going to happen as NAFTA gets renegotiated.
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Re: Is fast crash becoming more likely?

Unread postby pstarr » Sat 12 Aug 2017, 12:41:00

Fast crash is a consequence of exponential resource depletion and exponential population growth. The two are in lockstep, happening now and so the rest is timing, navel gazing, deck-chair arrangements. No one gets out alive.
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Re: Is fast crash becoming more likely?

Unread postby Outcast_Searcher » Sat 12 Aug 2017, 12:45:22

pstarr wrote:Fast crash is a consequence of exponential resource depletion and exponential population growth. The two are in lockstep, happening now and so the rest is timing, navel gazing, deck-chair arrangements. No one gets out alive.

So you're talking eventual crash, the end of BAU. Which we don't know the speed of. It could be slow, fast, or moderate, depending on many factors.

Got it. Let the fear mongering and statements of doom proceed, as usual.
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Re: Is fast crash becoming more likely?

Unread postby pstarr » Sat 12 Aug 2017, 12:48:02

Outcaste, It seems my fear mongering has failed. Shucks. :(

You are evidence . . . sooooo confident, cool and collected. At ease in a happy world lol
There's nothing deeper than love. In fairy tales, the princesses kiss the frogs, and the frogs become princes. In real life,the princesses kiss princes, and the princes turn into frogs

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Re: Is fast crash becoming more likely?

Unread postby Outcast_Searcher » Sat 12 Aug 2017, 13:12:59

pstarr wrote:Outcaste, It seems my fear mongering has failed. Shucks. :(

You are evidence . . . sooooo confident, cool and collected. At ease in a happy world lol

In a world more influenced by actual data than blindly and incorrectly making the same wrong predictions year after year, stretching into the multi-decade timeframe now, yes.

And given that my world is data based, freely commenting on the eventual problems that ignoring the perils of BAU population growth and consumption entail. (i.e. being a moderate, consistently).

If to you that's "happy world", fine. I would call it another example of your ignoring the data points around you.
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Re: Is fast crash becoming more likely?

Unread postby BahamasEd » Sat 12 Aug 2017, 16:37:43

As for the oil price going up, well shall see if that happens as classical supply/demand dynamics dictates it should or whether the Etp will stand strong in predicting a continued trend of a lowering of the price.


So far it looks like the ETP is holding up it's end!

This Week I have the ETP MAP at about $58.87(down .23 cents from last week).
The weekly close of WTI was $48.74 which is 82.7% (83.7% last) of the MAP price.
The 50 week EMA closed at $48.26 which is 81.96% (81.62% last) of the MAP price(up .02 cents).

I'm using a daily chart of this year for this weeks chart, the EMA line is 250 trading days at close. the upper yellowish line is at 85% of the current weekly ETP MAP price which is heading down to $54 at years end.

So far this year we've had a series of lower highs right around that point. But the next bit of chartology would be a lower low in the next month or so, something below $42.

We shall see...

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Re: Is fast crash becoming more likely?

Unread postby shortonoil » Sat 12 Aug 2017, 18:03:23

Fast crash is a consequence of exponential resource depletion and exponential population growth. The two are in lockstep, happening now and so the rest is timing, navel gazing, deck-chair arrangements. No one gets out alive.


The Etp Model gives us a theoretical 7.1 years worth of petroleum to be extracted. Of course, that is a best case scenario. With less than 8% of the conventional reserves, which are now being extracted, being replaced it is probably much less than that. Most reserves now being extracted have had to progress to using tertiary recovery methods. WAG (water alternative gas) being the most common. Tertiary recovering methods can extract from 7 to 20% of OOIP. That would put the average field in the area of no more than 3 to 4 years from going into terminal decline. Decline rates of 14% would not be unrealistic. That translates to 11 mb/ yr.

The real problem will lay with the financial system. World economic growth is declining; world debt accumulation is at least 10 times higher than GDP growth. The only way that this debt can be serviced is through the blatant printing being done by the central banks. That requires a functioning credit market to distribute the fiat. The credit markets have for the most part been tapped out. Everything has been tried; from zero down, zero %, 8 year can loans to financing over a $ trillion in shale that will never be repaid. The US government has over $20 trillion in debt, and it may not be politically possible to expand that much more. Once the credit markets can no longer absorb the central banks printing the world will fall into $250 trillion of cascading defaults. The end for modern civilization will come rapidly, and harshly.
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Re: Is fast crash becoming more likely?

Unread postby rockdoc123 » Sat 12 Aug 2017, 19:43:10

Most reserves now being extracted have had to progress to using tertiary recovery methods. WAG (water alternative gas) being the most common. Tertiary recovering methods can extract from 7 to 20% of OOIP. 


OH great, another completely stupid comment from shortonoil demonstrating his ignorance of the oil and gas industry.

First off WAG is not water alternative gas, it is water alternating with gas, the distinction is significant. This method is not a tertiary recovery method exclusively it is used in secondary recovery and more and more in primary recovery when the reservoir and fluids are amenable. The company I worked for some 20 years ago instigated a WAG setup as soon as we started producing in order to improve primary recovery.
Most reserves are under tertiary recovery and WAG? Exactly where did you get that gem of knowledge, please let us all know. Any WAG on Ghawar or Safaniya or Rumaila or West Qurna? How about all the oil and gas being produced in the US, how much of that is on WAG? Or all the heavy oil being produced in Canada, any of that on WAG. Basically your claim that all fields are on tertiary recovery is complete and utter BS.

The only way that this debt can be serviced is through the blatant printing being done by the central banks. 


Did you not read my comment when I explained it before? Central Banks do not “print money”. They use financial instruments that have nothing whatsoever to do with creating new currency. As I pointed out up thread the Treasury department prints currency and they only do that to replace currency that has been retired from the system. Do yourself a favor and research the subject a bit before pontificating.
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Re: Is fast crash becoming more likely?

Unread postby asg70 » Sat 12 Aug 2017, 19:56:08

pstarr wrote:Fast crash is a consequence of exponential resource depletion and exponential population growth. The two are in lockstep, happening now and so the rest is timing, navel gazing, deck-chair arrangements. No one gets out alive.


I'll have to remember that next time I gas up for $2.20 a gallon.
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Re: Is fast crash becoming more likely?

Unread postby ralfy » Sat 12 Aug 2017, 22:10:39

kublikhan wrote:We have already seen the developed economies level off/shrink their oil consumption while at the same time growing their economy. At this point in time, they are still very much oil dependent economies. However that doesn't mean that just because it took Y amount of oil to growth their economy by X amount last year, those same values are also required for next year. More fuel efficient cars, alternate transportation methods, recycling, structural shifts in the economy to sectors that consume less oil, all of these things enable an economy to grow while consuming less oil. At this point the oil consumption decline rate of the advanced economies has been fairly shallow. If the oil consumption decline rate becomes sharper, I would expect the effects on the economy will become sharper as well.


Yes, they can have economic growth without using more oil by creating more credit. But what's the point of doing that, i.e., assuming that by effects on the economy, you mean detrimental?

ralfy wrote:It doesn't go on indefinitely. It's cyclical. During the bust times, the seeds of the next boom are planted. It might be hard for you to see it right now, but I would not get too comfortable with low oil prices if I were you. It might take years, but eventually the oil price will come back up. Oil company bankruptcies will taper off. Layoffs will give way to new hiring. Investment declines reverse and turn into investment growth.


Th reason why business cycles are supposed to go on indefinitely is that there will always be more booms and investment growth. But how does that take place given what you shared in your next paragraph?

ralfy wrote:Our wants are irrelevant. Oil is depleting whether we want it to or not. We only have one Earth worth of resources to work with. If that means our current path of growing our global economy by feeding it ever larger amounts of oil will become impossible at some point, so be it. I did not join this site because I thought peak oil was BS. I joined it to explore the issues of oil depletion.


No more boom boom long time, then?
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Re: Is fast crash becoming more likely?

Unread postby kublikhan » Sat 12 Aug 2017, 22:59:23

Economic grow encompasses more than just increasing our resource usage or debt. Increasing our population and/or our rate of resource consumption is called extensive growth. However their is another type of growth called intensive growth. This grows our economy through more efficient uses of inputs. Your assumption that economic growth will cease if oil growth ceases neglects to consider economic gains from intensive growth.

An increase in economic growth caused by more efficient use of inputs (such as labor productivity, physical capital, energy or materials) is referred to as intensive growth. GDP growth caused only by increases in the amount of inputs available for use (increased population, new territory) is called extensive growth.

Productivity
Increases in labor productivity (the ratio of the value of output to labor input) have historically been the most important source of real per capita economic growth. Increases in productivity are the major factor responsible for per capita economic growth – this has been especially evident since the mid-19th century. The balance of the growth in output has come from using more inputs. Both of these changes increase output.

Other factors affecting growth
Political institutions, property rights, and rule of law

In economics and economic history, the transition to capitalism from earlier economic systems was enabled by the adoption of government policies that facilitated commerce and gave individuals more personal and economic freedom. These included new laws favorable to the establishment of business, including contract law and laws providing for the protection of private property, and the abolishment of anti-usury laws. When property rights are less certain, transaction costs can increase, hindering economic development. Enforcement of contractual rights is necessary for economic development because it determines the rate and direction of investments. When the rule of law is absent or weak, the enforcement of property rights depends on threats of violence, which causes bias against new firms because they can not demonstrate reliability to their customers.

In many poor and developing countries much land and housing is held outside the formal or legal property ownership registration system. In many urban areas the poor "invade" private or government land to build their houses, so they do not hold title to these properties. Much unregistered property is held in informal form through various property associations and other arrangements. Reasons for extra-legal ownership include excessive bureaucratic red tape in buying property and building. In some countries it can take over 200 steps and up to 14 years to build on government land. Other causes of extra-legal property are failures to notarize transaction documents or having documents notarized but failing to have them recorded with the official agency. Not having clear legal title to property limits its potential to be used as collateral to secure loans, depriving many poor countries one of their most important potential sources of capital. Unregistered businesses and lack of accepted accounting methods are other factors that limit potential capital.
Economic growth

Extensive growth, in economics, is based on the expansion of the quantity of inputs in order to increase the quantity of outputs, opposite to that of intensive growth. For example, GDP growth caused only by increases in population or territory would be extensive growth. Thus, extensive growth is likely to be subject to diminishing returns. It is therefore often viewed as having no effect on per-capita magnitudes in the long-run.

Reliance on extensive growth can be undesirable in the long-run because it exhausts resources. To maintain economic growth in the long-run, especially on a per-capita basis, it is good for an economy to grow intensively; for example, by improvements in technology or organisation, thereby increasing the production possibilities frontier of the economy.
Extensive growth
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Re: Is fast crash becoming more likely?

Unread postby pstarr » Sat 12 Aug 2017, 23:07:19

kublikhan wrote:Economic grow encompasses more than just increasing our resource usage or debt. Increasing our population and/or our rate of resource consumption is called extensive growth. However their is another type of growth called intensive growth. This grows our economy through more efficient uses of inputs. Your assumption that economic growth will cease if oil growth ceases neglects to consider economic gains from intensive growth.

Something is wrong with an economic theory that considers 10,000 ft laterals, 10 million gallons of fracting fluid (for a measly 130 barrels/day of production) to be an 'efficient use of inputs'.

Such enormous waste trumps imaginary substitution that VR robotic dreams promise.
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Re: Is fast crash becoming more likely?

Unread postby kublikhan » Sat 12 Aug 2017, 23:29:33

That's kind of my point pstarr. We as a society are incredibly wasteful with our energy consumption. Most of the energy we consume is wasted. We are increasing our our efficiency and our economy is growing even with lower energy use. However we have barely begun to scratch the surface with what we can accomplish on this front.

Listening to global leaders at CERAWeek in Houston, innovation in the fossil fuel industry was a frequent theme.

Despite the drop in investment, innovation doesn’t stop during low price periods. When prices are high, investment focuses on bringing new supply online. When prices are low, companies focus their efforts on efficiency—bringing oil and gas to market at lower cost. Some of these efforts focus on improving current processes, such as drilling longer laterals and fracking more efficiently in shale and tight oil and gas wells. Several industry speakers, including the CEOs of BP and ConocoPhillips, said that improvements in existing techniques will continue and that there are more efficiencies to be found.

Other efficiency efforts are focused on new technology—particularly, finding ways to better utilize data. One speaker pointed out that the oil and gas industry is somewhat behind the times in its technology and data use. Many of us use the app Waze, which tracks traffic via cell phone signals on the road to find the most efficient route to our destination. He noted that the oil and gas industry doesn’t have any data systems that are this high-tech. Data collection in the industry is running ahead of data utilization, and significant efficiencies could be found through better data analysis.
Energy innovation doesn’t stop when oil prices are low

Americans used less energy overall in 2015 than the previous year. Overall, Americans used 0.8 quadrillion BTU, or quads, less in 2015 than in 2014 (a BTU or British Thermal Unit, is a unit of measurement for energy; 3,600 BTU is equivalent to about 1 kilowatt-hour).

Much of the overall decrease in energy consumption can be traced to the shift from coal to gas, because modern gas-fired plants may use up to 46 percent less energy to produce the same amount of electricity." Renewable energy continues to grow, with use of wind energy up 5 percent, geothermal energy up 11 percent and residential solar energy up 11 percent.

Not all the energy consumed is put to use and accounts for the rejected energy. The country wasted 1 percent less energy in 2015, going from 59.4 quadrillion BTU in 2014 down to 59.1 quads in 2015. This decrease is tied to the increase in efficiency of the electricity production sector, such as large solar farms in the desert. The majority of energy use in 2015 was used for electricity generation (38 quads, down slightly from 2014), followed by transportation, industrial, residential and commercial. The residential, commercial and industrial sectors used less energy in 2015.
Americans used less energy in 2015
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Re: Is fast crash becoming more likely?

Unread postby godq3 » Sun 13 Aug 2017, 01:54:43

kublikhan wrote: ... our economy is growing even with lower energy use.

The point is that's not true. World economy uses more energy than 5 years ago, and much more than 10 years ago. IMO that's because true purpose of civilization is to use more and more energy each year, and the world economy is just a mean of doing it.
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Re: Is fast crash becoming more likely?

Unread postby kublikhan » Sun 13 Aug 2017, 05:00:39

I was referring to the US economy. The statement is also true of the developed economies. You are of course correct that the world economy continues to consume more energy year after year.
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Re: Is fast crash becoming more likely?

Unread postby shortonoil » Sun 13 Aug 2017, 07:16:36

That's kind of my point pstarr. We as a society are incredibly wasteful with our energy consumption. Most of the energy we consume is wasted.


Again your lack of knowledge in the field of physics is resounding! The energy is not wasted, it is the result of waste heat production that must take place for the process to go forward. The Second Law demands it. The efficiency of the system is determined by the temperature of the source and the sink. The sink is the environment which is defined as °77 F. It is the average temperature of the earth's surface. The source, in this case, is the average combustion temperature of a hydrocarbon. The maximum efficiency that hydrocarbons will ever operate at can not exceed about 20%. If you want something more than that you either have to come up with an alternative to hydrocarbons, or move to a different universe.

The present production of energy from the IC now being used has been refined for over a 100 years. Any additional efficiency gains that may be realized would not be worth the investment. They would be tiny. The only alternative is to shrink the overall use of energy, and that means shrinking the economy. That is now what is happening.

If you decide to move to a different universe, were the Laws of Physics are more to your liking - write if you get work!

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