U.S. Slashes Marcellus Shale Reserves

It is getting hard to believe the government’s energy reserve estimates, at least as they apply to America’s “100 years of natural gas” from shale.

The United States Geological Survey (USGS) just issued a report estimating that the Marcellus Shale contains undiscovered natural gas resources of about 84 trillion cubic feet (TCF). That is one-fifth of the original estimate.


The Energy Information Agency (EIA) had previously said in their Annual Energy Outlook 2011 that the United States has 827 trillion cubic feet of recoverable shale gas overall, and about 410 trillion cubic feet (nearly half of total reserves) of that gas is in the Marcellus shale. Bloomberg reported on the conflicting assessments in U.S. to Slash Marcellus Shale Gas Estimate 80 percent.

The Marcellus Shale assessment covered areas in Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, Virginia, and West Virginia.

Now, one-fifth of a 410 trillion cubic feet is still a big number, but needless to say one-fifth of a big number is, when all is said and done, only one-fifth of the original number.

How many years of natural gas supply is contained in shale deposits? We can use America’s current natural gas consumption to figure this out. The U.S. currently consumes about 23 trillion cubic feet of natural gas each year. Dividing that into the EIA’s original estimate of 827 trillion cubic feet, we get about 36 years of supply from shale gas. Dividing 23 into 400 – the original Marcellus shale estimate – we get about 17.4 years of supply.

Using the revised USGS estimate, if we divide 23 into 84, we get 3.6 years of supply from the Marcellus shale. We have suddenly lost 13.8 years of natural gas supply.

The EIA will adopt the USGS estimate, so it’s official. We are left with only 22.2 years of natural gas from all shale gas sources (the Marcellus, the Fayetteville, the Haynesville, etc.).

The hype behind shale gas supply and production in the United States is troubling. While this revision applies only to  the Marcellus Shale, it must cast doubt on other shale deposit estimates.

It’s apparent that shale natural gas is not the bountiful resource is was touted as. The phrase “100 years of natural gas” certainly sounds better than 22 years of supply from shale. The number “100″ has a nice ring to it. It’s a round number with a couple of zeros, and it pushes out an energy problem for many years – beyond the lifetime of nearly everyone alive today.

But when you stop to think about it, it’s really not a very big number. And now we have a number much closer to 20, which is much smaller, but perhaps more realistic.

Why Oil Prices Will Likely Stay High

After tumbling recently, crude oil prices rebounded last week. Are oil prices going to march higher again, or drop back to more “reasonable” levels? And what is reasonable to expect after crude oil’s already impressive 30 percent surge higher this year?

I believe crude oil prices are likely to stay high. They may even go higher. Here’s why and how you can profit from it.

1) Iraq Cuts Future Production Target in Half.

This spring Iraq announced that it will pump between 6.5 million and 7 million barrels per day (bpd) by 2017 – way down from its original plan of 12 million bpd.

It’s not because of low oil prices – oil prices have doubled since the 12 million bpd target was set two years ago.

Currently, Iraq produces about 2.68 million barrels a day, barely higher than under Saddam Hussein.

Iraq was one of the great hopes of those who believe we will always find more oil. Apparently, we aren’t finding it in Iraq.

2) The Saudis Failed to Cover Libya’s Shortfall.

Remember that when Libya, the world’s 17th largest oil producer, 3rd largest producer in Africa and that continent’s largest holder of crude oil reserves, fell into civil war in February. Its 1.6 million bpd production was quickly cut in half. Saudi Arabia said it would make up the difference.

Saudi Arabia DID pump more oil initially. But they have not been able to sustain the increase. Recently, Saudi oil minister Ali al-Naimi revealed that the country’s increased crude oil production has begun falling.

The Saudis blame lower demand for their “sour” (sour crude oil contains a higher percentage of sulfer and other undesirable chemicals that the preferred “sweet” ) crude. Sour crude is more difficult and costly to refine. Maybe lower demand actually accounts for the decreased production. Even so, this doesn’t do much to reassure the oil market that the Saudis can make up the difference when production of light sweet crude falls short.

Before the Libyan crisis, the Saudis claimed they could tap 4.2 million bpd of spare capacity at any time. During the Libyan crisis, the Saudis downsized their claimed spare capacity to 2.5 million to 3.5 million bpd. Some analysts believe the Saudis have only one million bpd in spare capacity. That’s not a lot of wiggle room if something else goes wrong … and something always goes wrong.

3) The Mystery in the Desert.

The Saudis are up to something. The richest oil producing nation in the world appears to be hedging their bets. Recently, Saudi Arabia announced it was going to spend $100 billion on solar, nuclear and other renewable energy sources. That is a lot of money for a country that is supposedly floating on all the oil and natural gas it should ever need.

The Saudis say they are doing this to boost the amount of spare oil they have for export. The Saudis currently consume 2.7 million bpd (27 percent of their total production) and that is expected to grow to 8 million bpd by 2025. For comparison, Americans consume 20 million bpd.

Still, if the Saudis have all that spare oil, why don’t they just sink a few more wells? Unless, maybe, they don’t really have that spare capacity.

4) The Global Economy Runs on Oil.

The International Monetary Fund (IMF) expects global economic growth for 2011 to be 4.4 percent. This will put more strain on a system that already saw global oil consumption grow by 2.6 percent in the first quarter of 2011, on top of 4.1 percent growth in the fourth quarter of 2010, according to the International Energy Agency.

5) Asia Puts the Pedal to the Medal.

While the IMF expects the world economy to grow at 4.4 percent pace, emerging market economies are growing much faster. The Asian Development Bank expects a growth in the region’s economy, of 7.8 percent and 7.7 percent for 2011 and 2012 respectively.

That’s bullish for oil prices because automobile ownership and gasoline and diesel usage is growing at a furious pace in those countries.

According to the Financial Times, while European crude oil demand has been flat, and U.S. oil demand might grow 2.9 percent, Asia, as a whole, is expected to see its oil demand rise 5.9 percent and China’s should rise 9.6 percent.

And it should keep rising. In China, a big driver of oil consumption has been growth in the domestic automobile market. Data released by the Chinese Auto Association shows sales grew more than five percent on a year-over-year basis.

I have outlined five reasons why oil prices will likely stay high. But, of course, no one can foresee the future with certainty

Could Oil Prices Go Down? Yes, but You Won’t Like Why!

The only foreseeable way that crude oil prices could fall is if we have another global recession (or depression). Such an environment would downshift those growing emerging market economies in a hurry and should send oil prices lower.

But probably not for long. Why? Because existing oil fields are depleting – the average depletion rate is just about five percent per year, according to the Association for the Study of Peak Oil. The cheap oil is being used up. As I’ve written before peak cheap oil is already upon us.

At the same time, the newer oil projects coming online require higher and higher break-even costs. Estimates of break-even costs for new oil projects range from $79 per barrel to $92 per barrel. And the heralded new sources of oil such as oil sands have significantly lower net energy returns and far higher environmental consequences than existing, conventional sources. For example, it is estimated that the Canadian Athabasca oil sands project, the largest in the world, requires the equivalent energy input of one barrel of oil to extract 1.5 barrels of oil sands crude.

A “reasonable” price for crude oil gets higher all the time.

If oil prices dipped below those higher break even prices, the new projects would shut down. Soon, we’d have less supply coming on to the market. That, in turn, would force prices higher, whether the economy was in recovery or not.

How Can You Play the Next Surge in Oil?

There are certainly many oil related individual stocks available. However, I’m a big believer in Electronic Traded Funds (ETFs). ETFs offer the diversification of a mutual fund, yet they trade like a stock – the best of both worlds.

Oil explorers and producers are leveraged to the price of oil. One of the easiest ways to play what will likely be higher prices – and big fat profit margins for oil companies – is to buy the Energy Select SPDR (XLE). And the stocks that form the backbone of the XLE should also do well on an individual basis.

Other ETFs that offer participation in higher oil (and overall energy prices) include the popular United States Oil Fund (USO), its leveraged cousin ProShares Ultra DJ_AIG Crude Oil ETF(UCO), the ProShares DB Oil Fund (DBO) and the currently out-of-favor United States Natural Gas Fund (UNG). There are many other energy related ETFs available at The EFT Stock Encyclopedia.

No one likes paying higher prices at the pump. But you can prepare for higher energy prices and potentially profit from them.

Peak Cheap Oil

The included link will launch a 30 minute presentation given by Erik Townsend at the 9th Annual ASPO Conference held April 27 – 29 in Brussels, Belgium. ASPO is the Association for the Study of Peak Oil & Gas. ASPO is a non-profit organization of scientists who have an interest in defining the date and impact of the peak and decline of the world’s production of oil and gas.

Erik Townsend made his money as a businessman and entrepreneur during the 1990s tech boom. He is now a private investor based in Hong Kong.

The presentation opens with Mr. Townsend drawing what we think is an important distinction between Peak Oil and Peak Cheap Oil. Peak Cheap Oil refers to oil that can be easily and inexpensively extracted and refined. Supergiant oil fields, predominately in the Middle East, are the bastions of inexpensive oil. It is Mr. Townsend’s contention, and we agree, that those fields have peaked and are in decline. While there may be a significant amount of oil yet in reserve, these reserves are, in most cases, located deep under water or in inhospitable climates, such as the Arctic; or they require exotic and expensive techniques to recover the oil.

As an example… oil sands, such as the massive Athabasca project in Alberta, Canada, are touted as the future of oil production. Yet, analysis of the net energy gained from oil recovered from Athabasca is revealing. Estimates indicate that it requires the equivalent energy input of one barrel of oil to recover 1.5 barrels of oil from Athabasca.

Mr. Townsend covers a lot of ground in 30 minutes – from a basic discussion of peak oil to a description of possible scenarios for the financial markets as peak oil is acknowledged. He also mentions several possible investments to participate in coming energy bull market. It’s an excellent presentation and well worth your time.

Things Will Unravel Faster Than You Think

We are not on the path to economic recovery despite what the government and main stream media want us to believe. There are potentially catastrophic financial events coming in the near future that have been caused by underlying structural weaknesses in our economy have not been resolved. The kick-the-can-down-the-road plan is going to encounter a brick wall in the not-too-distant future. When the next moment of disruption finally arrives, events will unfold much more quickly than most people expect.

We live in a non-linear world. But far too many people expect events to unfold in a more or less orderly manner, with plenty of time to adjust along the way. In other words, linearly. The world does not always cooperate. We face the convergence of multiple trends, each of which has the power to transform our economic landscape and standard of living.

Three trends that will shape our immediate future are:

  • Peak Oil
  • Sovereign government insolvency
  • Currency debasement

Individually, these are game changers. Collectively, they have the potential to change the world as we know it.

History shows that instead of a nice smooth line heading either up or down, markets have a habit of jolting rather suddenly into a new paradigm, either higher or lower. Social moods are steady for long periods, and then they shift, sometimes dramatically. This is what we should train ourselves to expect.

Learning To Accept “What Is” Instead of “What Should Be”
We must get our minds to accept reality without our beliefs interfering. I mean statements like these:

  • “Things always get better and are never as bad as they seem.”
  • “If Peak Oil were real, I would be hearing about it from trusted sources.”
  • “Dwelling on the negative is self-fulfilling.”

While each of these things might be true, they also might be false and misleading, especially during periods of transition. In order to prepare for what’s ahead it is key that we remain as dispassionate and logical as possible.

Let’s examine the three main events that are converging — Peak Oil, sovereign government insolvency, and currency debasement.

Peak Oil
Peak Oil is a matter of debate at the highest levels of industry and government. Recent reports by Wikileaks, the US Department of Defense, the UK industry taskforce on Peak Oil, and the German military are evidence of this. The debate is not about whether or not Peak Oil is real, only when it will arrive. The emerging consensus is that oil demand will outstrip supplies “soon,” within the next five years and maybe as soon as two. So the correct questions are no longer, “Is Peak Oil real?” and “Are governments aware?” but instead, “When will demand outstrip supply?” and “What implications does this have for me?”

It doesn’t really matter when the actual peak arrives. What matters is when we hit “peak exports.” My expectation is that once it becomes fashionable among nation-states to finally admit that Peak Oil is real and here to stay, one or more exporters will withhold some or all of their product “for future generations” or some other rationale (such as, “get a higher price”), which will rather suddenly create a price spiral the likes of which we have not yet seen.

What matters is an equal mixture of actual oil availability and market perception. As soon as the scarcity meme gets going, things will change very rapidly.

In short, it is time to accept that Peak Oil is real — and plan accordingly.

Sovereign Insolvency
Once we accept the imminent arrival of Peak Oil, then the issue of sovereign insolvency jumps into the limelight. Why? Because the hopes and dreams of the architects of the financial rescue entirely rest upon the assumption that economic growth will resume. Without abundant supplies of oil, such growth will not be possible. In fact, we’ll be doing really well if we can prevent the economy from backsliding.

Virtually every single Organization for Economic Co-operation and Development (OECD) country, due to outlandish pension and entitlement programs, has total debt and liability loads that have resulted in a negative net worth for the governments of Germany, France, Portugal, the US, the UK, Japan, Spain, Ireland, and Greece. And not by just a little bit, but exceptionally so, ranging from more than 450% of GDP in the case of Germany on the ‘low’ end to well over 1,500% of GDP for Greece.

Such shortfalls cannot possibly be funded out of anything other than a very, very bright economic future. Something on the order of Industrial Age 2.0, fueled by some amazing new source of wealth. Logically, how likely is that? Even if we could magically remove the overhang of debt, what new technologies are on the horizon that could offer the prospect of a brand new economic revival of this magnitude? None that I am aware of.

In the US, the largest capital market and borrower, even the most optimistic budget estimates foresee another decade of crushing deficits that will grow the official deficit by some $9 trillion and the real deficit by another $20 to $30 trillion, once we account for growth in liabilities. This is, without question, an unsustainable trend.

It’s time to admit the obvious: debts of these sorts cannot be serviced, now or in the future. Expanding them further with fingers firmly crossed in hopes of an enormous economic boom that will bail out the system is a fool’s game. It is little different than doubling down after receiving a bad hand in poker.

The unpleasant implication of various governments going deeper into debt is that a string of sovereign defaults lies in the future. Due to their interconnected borrowing and lending, one may topple the next like dominoes.

It is when we consider the impact of Peak Oil on the story of growth that the whole idea of sovereign insolvency becomes much more probable.

We need to accept that there’s almost no chance of growing out from under these mountains of debts and other obligations. We must move our attention to the shape, timing, and the severity of the aftermath of the economic wreckage that will result from a series of sovereign defaults.

Currency Wars
We can make a very solid case that once a country breaches the 300% debt/liability to GDP ratio, there’s no recovery, only a future containing some form of default (money printing or outright default).

You can be nearly certain that every single country is seeking a path to a weaker relative currency. The problem is obvious: everybody cannot simultaneously have a weaker currency. Nor can everybody have a positive trade balance.

If a country or government cannot grow its way out from under its obligations, then printing (a.k.a. currency debasement) takes on additional allure. It is the “easy way out” and has lots of political support in the home country. Besides the fact that it has already started, we should consider a global program of currency debasement to be a guaranteed feature of our economic future.

We’ve identified three unsustainable trends. They are intertwined to a degree. I find no support for the idea that the economy can expand like it has in the past without increasing energy availability, especially oil. All of the indications point to Peak Oil, or at least “peak oil exports,” happening within a few years.

At that point, it will become widely recognized that most sovereign debts and liabilities will not be able to be serviced by the miracle of economic growth. Pressures to ease the pain of the resulting financial turmoil and economic stagnation will grow, and currency debasement will prove to be the preferred policy tool of choice.

Instead of unfolding in a nice, linear, straightforward manner, these colliding events will happen quite rapidly and chaotically.

By mentally accepting that this proposition is not only possible, but probable, we can make the choices and take the actions that can preserve and protect wealth and mitigate risk.

What changes in our actions and investment stances are prudent if we assume that Peak Oil, sovereign insolvency, and currency debasement are ‘locks’ for the future?  More on that later.