Right on America’s Independence Day it was announced by Bank of America energy number crunchers that the United States will this year surpass Saudi Arabia and Russia to become the world’s larger producer of oil. According to the Charlotte, North Carolina-based bank, U.S. production of crude oil, along with liquids separated from natural gas, surpassed all other countries, with daily output exceeding 11 million barrels in the first quarter. This means that the U.S. is now the biggest producer of both oil and natural gas — the country became the largest producer of natural gas in 2010 — and the second-largest coal producer, after China.
All-in-all, this represents a major victory for the country’s fossil fuel industry and one that many critical of the sector — including this writer — doubted would occur at all, let alone so quickly.
Indeed, just a few years ago, sky-high prices and the prospect of unrelenting demand from the likes of China and India raised the frightening specter of peak oil — the theory that global oil production would soon hit a peak and then inevitably fall as aging fields and lack of new discoveries kept the world’s oil addiction from being fed. Prices would spiral even farther out of sight and economic and political calamity would result.
All this seems to be wrong now, and the proof of that is in the fossil-fuel pudding as represented by these new production numbers. Oil, gas and coal, say boosters, will be here for a long time to come, and naysayers who were just recently touting peak oil nonsense should be ignored for the Chicken Littles they turned out to be. Now, if only climate change and anti-fracking activists could get out of the way, then America could really produce and take us all into the fossil future on a never-ending wave of sweet, cheap crude.
Maybe, but very likely not in the way America’s fossil fuel magnates would have us believe. That’s because whereas the industry is correct that current production has exceeded the expectations of those doubting the viability of hydraulic fracturing, or fracking, to meaningfully impact the nation’s oil supply, it has yet to demonstrate that increased output has had as big an economic impact as those magnates would like to have us all believe. Indeed, the underlying problems with the technological revolution behind oil and gas’ resurgence here in the U.S. — fracking — have not gone away. In fact, they’ve gotten worse.
One only needs look at current prices for global oil — West Texas Intermediate, the price Americans pay for oil, and North Sea Brent, the price the rest of the world pays. If the boom in U.S. production was such a huge factor on global markets, then prices should not be stabilized at just above $100 per barrel, which seems an impossibly high price to pay, compared to the early 2000s. True, ongoing problems in major exporting countries such as Nigeria, Iraq and Libya have kept the “fear premium” going in oil markets and U.S. production has perhaps kept prices from going higher, but what is clear here is that prices have not diminished appreciably due to the shale boom taking place here.
This suggests that although America’s increased production is important in keeping prices from going too high, not nearly enough hydraulically-fractured shale oil is flowing to market to push down prices. Why this should be the case is easy to understand once one recognizes that the price of fracking shale in order to produce a given barrel of oil is much, much higher than it is for a conventional barrel. While estimates vary, it is generally believed that the price per barrel of crude that makes fracking cost-effective is somewhere $60 to $80 a barrel. Since the price of a barrel hasn’t dipped below $80 since 2012, U.S. shale crude has flowed, but it has done so as the marginal barrel. This means that above this price range, shale crude will be tapped to take advantage of high prices, but when prices dip below that price, shale production will cease due to its higher cost of production. Hydraulically-fractured shale, in other words, is an artifact of high oil prices, not a reducer of them.
The crucial question, therefore, is to what degree the cost of shale production can come down vis-à-vis conventional supplies like those in the Middle East, Russia and our older fields here in America. While some progress has been made in reducing costs by turning shale drilling into a factory-like process, the reality is that shale crude is simply inherently more costly to produce because shale is a much less productive source to drill for hydrocarbons than traditional reservoirs.
This is due entirely to geology, as shale formations are geologically “tight” and lock up oil and gas far more effectively than non-shale reservoirs, which are more porous and comparatively “loose.” While fracking the shale knocks some of this tight oil and gas loose, it does so over a far smaller volume underground than in a traditional, non-shale formation. One way to understand the difference is to think of a conventional reservoir and well as a large, water-filled balloon that has a tiny hole poked in it. Because no barriers inside the balloon keep water from flowing to the hole, just a few holes can suffice to extract a great deal of water — or oil, as the case may be — when enough pressure is at work. Indeed, this is where the image of the classic gusher — depicted so well in the movie “There Will Be Blood” — emanates.
Shale reservoirs are very different. To continue with the analogy, a shale formation is much more like a big ball of bubble wrap, with each bubble containing the fluid to be extracted. Fracking a single well effectively liberates the fluid in one of those bubbles, but it does nothing to extract the fluid contained in all the other bubbles. For that, another well is needed to puncture another bubble container, and so on. Thus, the huge difference between a conventional oil formation and a shale formation — a single prick can extract all the oil from the conventional oil balloon, but to extract the same amount from the shale-oil bubble wrap balloon you need many, many, more pricks.
Just how many more do you need? Well, the Paris-based International Energy Agency compared production in North Dakota’s Bakken oil field, a vast shale oil deposit in the country’s High Plains, with production in Iraq, a country rich in conventional oil formations and reserves. The difference, as you might expect, is huge, but the reality of the numbers is staggering even to those familiar with them. To maintain production of 1 million barrels of oil a day from Iraq, for instance, one needs to drill just 60 new wells a year. Extracting the same amount from the Bakken would require 2,500 new wells.
While this can and obviously is happening, it is happening at a huge environmental and economic cost that is sinking more and more economic resources into the sector in order to get out less and less crude — the very definition of diminishing returns. What’s more disturbing still, these wells remain flowing for a far shorter period of time than conventional fields. A typical fracked well poked in the ground in Oklahoma in 2009, for instance, debuted with an output of about 1,200 barrels of oil per day. Just four years later, however, output from the same well has fallen to just 100 barrels of oil per day.
While output and well lifespan will vary, such rapid rates of decline are extremely common and are something of a dirty little secret of the current oil boom. Just to sustain output, the industry has to run faster and faster by drilling ever more wells, while actually increasing output requires truly Herculean feats of industrial mobilization and organization. To double that output from the Bakken, for instance, would require 5,200 new wells a year, and tripling it would require 7,800 and so on. Then, to the horror of all, less than a decade after all that was done, that additional million barrels of oil a day in production would be reduced to just 100,000, no matter what the oil companies do, because of the nature of the formation where the well was drilled.
After a certain point it simply becomes physically impossible to drill that much — the entire U.S. would be fracking shale. More terrible still, this assumes more and more land can be opened up to hydraulic fracturing to keep the boom going. Unfortunately, this, too, quickly runs up against physical reality, as shale formations, like conventional oil deposits, simply don’t exist everywhere. They are found only in certain locations due to geology, and even then, a shale formation might be too difficult to fracture economically unless the underground situation is remarkably favorable.
This is is exactly what happened with California’s Monterey Shale, which the U.S. Energy Information Agency thought contained 13.7 billion barrels of oil in 2011. Closer examination, however, revealed the formation to be much more broken up underground than previously thought — so much so that only around 600 million barrels may ultimately be recovered with current technology. That’s a 97 percent downgrade, and there is no guarantee that other rosy predictions of shale oil riches both in the U.S. and elsewhere won’t have similar outcomes.
Meanwhile, there is also the water problem. As the name hydraulic fracturing suggests, the process uses huge amounts of the substance. Experts say the average fracked well uses some 4 million gallons of fresh water, which should suggest to you the vast amount of water required to keep that 1 million barrels of crude oil a day flowing from wells drilled in North Dakota. While much of this water can be reclaimed and recycled for use in other fracking operations, this will only occur if fresh water is priced accordingly and if frackers are forced to do so. If the cost of using fresh water is cheaper than reclamation, then much of this water will be wasted, potentially setting up a huge conflict over water access between frackers and other users. In the arid West, in particular, where water shortages are already acute and worsening, hydraulic fracturing may simply never be viable.
So what does all this mean? America has surpassed Russia and Saudi Arabia as the world’s largest oil producer, but any serious examination of the new technology and its actual, physical processes and economics should leave some room to doubt its long-term viability as a foundation of U.S. energy security. More oil and gas may indeed be produced in the short run, but as a long or even medium-term solution to America’s energy demands, hydraulically-fractured oil is a non-starter. In less than a decade the wells now producing all this oil will have effectively run dry, while ever more land will have been turned over for exploration and production. When that runs out, we’ll be right back where we started, but with a lot more poisoned land and water to show for it.