Editorial comment

	Vol. 230 No.2
PERRY A. FISCHER, EDITOR

Crystal balls

Isn’t that what you’re supposed to look into when you predict the future? I’ve been through 10 of these forecasts, and by far, this was the toughest one. One reason is because, while we were trying to determine well counts and rig counts for last year, and to gauge operators’ plans for this year, the situation was changing rapidly. December was nearly a freefall in rigs in many areas, and the first three weeks in January were not much different. Still, there was reason for optimism. But first, a word about the “dismal science”; that is, economics.

The really odd thing is, in order to get the economy (in many ways, the world economy) rolling again, the US has to do much of the same things that got it into this mess to begin with: create “easy money,” loaning to less-than-sterling borrowers; allow mergers that will create even bigger corporations that are “too big to fail”; deficit spend in the extreme; borrow money from anywhere it can; sell off the US (land, assets and businesses) to anyone who will buy; increase social spending; and so on.

I strongly suspect that the US will be able to borrow its way out of debt one more time, but it may well change the way we relate to money. Imagine some congressman making a speech about wasting $5 million. That much would be spent in the time it took to talk about it. If it isn’t at least a billion, it’s not worth consideration. Add $1 trillion deficits, $50 trillion swaps markets and $650 trillion in the global value of derivatives, and it simply becomes too unfathomable. Thus, a million means little. Economists are saying that they expect that, when all of the stimulus deficit spending is said and done, the US will have accumulated a ratio of debt equal to about 70% of its economy (as measured by GDP). In comparison, the US went over 100% as a way to pay for World War II.

So, in effect, economists, followed by politicians, are saying that the US should fight this recession as seriously as if it were a war. But as I’ve said before, at least half of this economic stuff is about instilling confidence, and considering the size of the hole, President Obama needs to walk on water to instill the needed confidence. The first US president, George Washington, just crossed the Delaware River in a rowboat and look what it did for him! Everyone is predicting much worse before it gets better, which becomes a bit self-fulfilling.

The corrupt banking, lending and governmental practices of the US were exported to much of the world, much to the world’s regret at this point. In an analogous manner, the US is exporting unconventional gas E&P practices to other countries. They might well regret that too. And that’s the good news. To maintain near-constant natural gas production in the US, the country has had to steadily increase the number of gas wells drilled, now drilling 2½−3 times as many gas wells as it did in 2002. The problem is that these wells deplete quickly, especially in the first year, and they have low flowrates. Payout does not occur on anywhere near as many wells as does conventional reservoir development drilling. The good news in this is that gas prices cannot stay low for long, as this type of drilling requires gas prices $2−$3 higher than in the US and Canada today.

Nevertheless, like banking, I expect that shale-gas drilling will proliferate throughout Canada (where it already is), Europe and beyond. LNG is just not yet mature enough to be relied on in the short term. But no doubt, with more than 7,000 Tcf of proved reserves in the world, and annual use of about 100 Tcf, the world has at least a 70-year supply of gas. Thus, LNG will become a ubiquitous source of supply for most gas-importing countries in years to come.

Oil is much less certain: I have no idea whether OPEC can maintain the necessary solidarity to prop up prices. Demand is so abysmal that the cartel will have to take at least 2 million barrels a day off the market; even more if the global economy weakens, or if China runs short of cash reserves now being used to prop up its economy. But Saudi with good friend UAE, together with hardliners Iran and Venezuela, certainly have the ability to make the cartel work. Whether they have the will is another matter. Absent the cuts, the world would be seriously overproducing oil.

Not that we hadn’t noticed, but measures of market volatility are quite high, even by historical measures. Depending on what you want, that might be good news. It does mean that we can expect some days in the coming year to be profitable for E&P players, at least on those days when oil and gas prices soar; on other days, they’ll be losing money, as market volatility continues to be schizophrenic, very often extremely contrary to supply and demand data or even political developments.

Also, against all odds, the Peak Oil community is still getting attention. I suppose that some things, like the seasons, are just perennial. I recall telling a few Peak folks that I thought we had at least one good oil-supply glut left. And that I could see oil easily getting back to the $30 range. They said that I was insane, that there was no chance of that happening.

Shortly thereafter, in May of last year, I wrote a satirical piece that said, among other things, that “there are a lot of ways that Chinese and Western demand could crash, including another US Great Depression, mass-extinction meteorites, nuclear Armageddon...” and so on. I hope that the satire does not turn out to be prescient.

But it is true that all of this is against the possible backdrop of Great Depression, Part II. Should that happen, all bets are off. Such a deflationary spiral would affect demand of electricity, fertilizer, petroleum products, steel and so on, across a broad range. That would force prices and oil and gas production lower.

I read one of those fake headlines on the internet. Deviously hilarious, but obviously written to make Republicans laugh the most: “The world press declares Obama twice as awesome as previously thought.” In that vein, our best chance is that he’ll make it at least halfway across the Delaware before he sinks. That’s about what it’s going to take to succeed.