Monday, April 16, 2012

Larry Kudlow, Sarah Palin, President Obama, oil prices & failed communist dictators, promising progress: More in common than you think.

            I decided to write this article a few weeks ago, as I watched Mr. Larry Kudlow on CNBC, tell the viewer that there is so much petroleum in the US, that Americans can unilaterally change the global oil market in a positive way, driving prices at the pump much lower.  This could only happen if the political will wasn’t lacking, of course.  Last Friday, I also watched a similar show, hosted by Sarah Palin, on FOX news, called “paying at the pump”.  The barrage of distorted information is just incredible.  The last time, I experienced such an intensive barrage of public misinformation was as a child, when Eastern Europe’s communist dictators were desperately trying to convince the masses that all was well, even as the system was failing miserably.  People never believed it of course, so they took to the streets, ending their failed policies.  Unfortunately, people in the west tend to be more gullible, due to their firm belief in the validity of their elites.    

Kudlow’s claim:

            US president Obama stated that the US only has 2% of the world’s proven reserves.  That is in part technically correct.  The EIA, and IEA both agree that the US has about 22 billion barrels of proven reserves, while the world has about 1.3 trillion barrels.  This of course does not mean that 22 billion barrels is all there is that will ever be recovered.  New discoveries, technological innovation meant to improve recovery rates, and price incentives can all potentially add to that number substantially.  Mr. Kudlow and Sarah Palin took issue with it, counterclaiming that president Obama is using outdated methods of assessing the situation, and we in fact have over sixty times more oil that is technically recoverable than president Obama claims.  The US therefore could drill its way to lower gasoline prices, and to energy independence.  To back his claims, Mr.Kudlow cited the Institute for Energy Research; a non profit organization, funded by energy company donations, which is run by a former Enron employee.

Keeping Kudlow and Palin honest:  (not easy)

The categories of oil can be divided into conventional fields, including offshore and deep offshore, in other words, the stuff we usually think of when someone mentions oil.  There are the oil sands, which currently are mainly produced in Canada, but the US also has some resources.  There is the shale oil (tight oil), which recently became responsible for most of the 10% or so increase in US oil production that we got in the past few years, thanks to fracking technology that initially was used to produce shale gas.  There is also the oil shale, which periodically makes it in the news as a potential future source of oil, but in reality, it never made it as a commercially viable source of energy thus far, and there is no indication that it ever will.

Conventional Fields:

- (Total oil in place 5-600 billion barrels x .5 optimistic recovery rate) – 180 billion barrels already produced = maximum 120 billion barrels still left to be produced.

            -Note:  Current recovery rates according to most geologists working in the field is under 40%.  I used 50% to account for future innovations, yet to happen.

US Shale Oil: (tight oil)

Total oil in place, up to a trillion barrels, out of which the US department of energy estimates that up to 4 billion barrels are recoverable in the Bakken formation, while another 3.5 billion can be recovered from the Eagle Ford formation.  A few smaller formations also can potentially add a billion barrels or so.

Rounding it out to about 10 billion barrels that can be recovered, according to US department of energy and the United States Geological Survey (USGS), gives us a recovery rate of oil in place for this resource of about 1%.  We can choose to be optimistic, and assume that new, yet to be developed and perfected fracking techniques can increase this number five fold, giving us a potential reserve of 50 billion barrels.

Oil Shale: (not the same resource category as above)

The green river formation contains kerogen, which is not quite oil.  It is a solid form of hydrocarbon, which would need to be cooked to become oil.  There are to date no commercial operations of great significance anywhere on this planet.  Only small pilot projects were attempted as experiments, which thus far have been largely unsuccessful.  The US does have about 2 trillion barrels equivalent of this resource, but thus far, we cannot count even one of those barrels as reserves.  I think there is some potential for this resource to be mined and used directly in power plants, similar to what we do with coal.


According to the US department of energy, there may be up to 80 billion barrels in, place, from which as much as 11 billion barrels may be recoverable.  One issue is that due to different technical challenges than what the industry encountered in Canada, new techniques have to be developed, which have not yet been developed, so in fact the technology does not yet exist.  In this particular case, we can assume that the technical challenges can be overcome, so a rounded up total of 10 billion barrels of potential reserves is appropriate to consider.


120 billion barrels conventional + 50 billion barrels of tight oil + 10 billion barrels of oil sands = 180 billion barrels potentially still left to be produced.  This is my own approximation.  The US department of the interior, estimates that aside from the 22 billion barrels in proven reserves, there is an additional 134 billion barrels in conventional and unconventional fields that can potentially be extracted, giving us a total of 156 billion barrels.  I should point out however that the word “potential” implies that it is by no means a done deal, so we can only count on the currently proven reserves as a resource that we can know for sure that it will be there with 100% certainty.

To add some perspective to the numbers above, the US currently consumes about 7 billion barrels per year, while the entire world consumes about 31 billion.

One thing that the ultra optimist voices may still be right about is that this potential resource, if it will ever be produced, is more that the Saudis may have left, because the 260 billion barrels that they claim to have in reserve, is now widely believed to be more hype than volume.  So the US may indeed have more oil than Saudi Arabia, but that is not necessarily great news for the global oil market.

Kudlow & Palin versus Obama:

            As we can see, even though president Obama chooses to refer to the more conservative estimate of actual proven reserves, he is a lot closer to reality with his 22 billion barrels than Mr. Kudlow is with his 1.4 trillion barrels.

            President Obama is also right to claim that we cannot drill our way to long term low prices, because we should not forget that the oil and the finished refined products market is a largely open, international market.  Mr. Kudlow should know this by now, since he is after all in finance.  In effect, a surge in production in the US may only serve to dampen prices temporarily, until demand catches up to supply.

            There is also the issue of the more expensive supplies being produced currently around the world, which would cease production in the event that US would be able to push prices down significantly, so in reality, given that we are now dependent on many sources of expensive to extract oil, we cannot expect to be able to drive prices down significantly.  This is also a basic of supply and demand economics which Mr. Kudlow seems to prefer to ignore.

            Since the very basic theories in economics are being so carelessly ignored in this conversation, I decided to add a very basic supply/demand model, showing how price and quantity interact with each other.

                As you can see, the effect that increasing supply of a product has, is to move the supply demand balance from point a, to point b.  This in reality would cause many oil sources that depend on the current price in order to at least break even to cease production.  Deepwater sources come to mind.  So, in the long-run, a ramp up in US production, which itself would come from sources that are on the expensive side, would not affect the current balance all that much.  The balance might move back to point a in a relatively short period of time.  As you may have noticed, I did not include a second line for demand, to deal with the expected increase in global consumption, in the absence of recessionary pressures, but we should not forget that a ramp up in US production of this finite resource can only have the effect of delaying the current high cost by a few years at best.  It most definitely cannot create a new permanent balance point.

The first symptoms of a failing society, led by elites with no answers to counter increasingly grave problems.

            The communist system I was born into had many structural problems.  The base it was founded on was flawed, because Marx envisioned a utopian society, devoid of desire to accumulate more than others in terms of goods, prestige and power.  Nor did he acknowledge the benefit of harnessing the individual drive towards prosperity.   With some reforms, the system might have survived for a while longer, and people would have been spared decades of hardship.  Reforms were not possible, because the elites never admitted to the problems.  The rotten foundation was never recognized, and neither were the many mistakes that the elites made, which took their toll with a cumulative, and eventually disastrous effect.

            Now here we are!  Our problems are dismissed by one faction, which chooses to make more and more outrageous claims. The problems are assumed to be resolvable by the other faction, by implementing flawed solutions, in the form of local sustainability initiatives, which do not allow us to survive in the long run, because they are causing economic disadvantages in the short run.  In effect, the solution they recommend to counter our sustainability problem is not sustainable economically.  The fact that sustainability is a global public good, and should be treated as such, continues to be ignored. 

We the people are left in the middle, confused, indoctrinated into believing into one faction’s rhetoric or the other’s, mainly through a barrage of false and distorted information, like the above mentioned examples I gave.  We as a society that is shaped in a way that requires the elites to court our blessings for their actions are unfortunately highly over-tolerant of being fed false information, in order for us to be convinced into giving our blessing.  The problems are accumulating in the meantime, because we are not tackling them.  The damage will at some point become more than our institutional cohesion can bear, at which time there is nothing left but painful failure.  


  1. This is a reasonable understanding of the world's position with regard to oil. However, any premise that includes a call to "drill here, drill now, drill forever", as the Sarah Palin crowd screams at every given chance ignores a fundamentally flawed assumption. They assume that this is a long term solution when at best, it might serve to lower prices briefly and marginally.

    In the past, OPEC reacted to our lowering consumption or increasing production by lowering their production by equal measure thereby keeping the world price about the same. They get to make a lot of money by selling slightly less oil for higher prices, and they get to keep more of their reserves for later when prices invariably rise.

    We, on the other hand, drill and refine our product, leaving less in the ground for later when it's even more valuable. And does it really lower our prices at the pump. Not really, because being a global commodity, the oil companies will sell to the highest bidder leaving us paying the same high prices as before.

    The only winners are the oil companies. This is the future Palin and her ignorant ilk want.

    1. Unfortunately, it is not just about Palin. On the other side, there are some serious distortions as well. Alternative energy would be a fine thing if implemented globally, but it is ruinous to the local economy, if done on a regional scale. The EU is a good example of that. I wrote an article about it in March. It is my second article on the Rio + 20 meeting comming up in June. I recomend you read it.
      Aside from that, the Obama administration will engage in some serious distortion of public opinion by claiming that it is the fault of speculators, which is a movie we have seen before, but for some reason we don't get tired of it.