Friday, March 29, 2013

Managing Financial Risk:Why Cyprus is Important

      The looting of Cyprus bank deposits by EU financial authorities  sent a shiver down my financial nervous system. You know the anatomy, right? There is the central nervous system(CNS), the autonomic nervous system(ANS), and the financial nervous system(FNS). I don't want to get into the complex anatomy and function of the three systems. I'm not even sure where the FNS lives but I suspect it is  in the left brain somewhere. Regardless, I know a shiver when I feel one.
    In case you haven't been paying attention, EU banking authorities as part of a rescue package of  the insolvent Cypriot banking system, a subset of the insolvent Greek banking system, has seized a portion of depositor assets in those banks above a certain level. The level and the proportion varies from day to day but everything above a 100,000 or 200,000 Euros will be subject to a levy of a variable amount from 30 to 90 %. The banks were closed to prevent a run and capital controls instituted. Now a pensioner can just get a few hundred Euros a day to buy a herring and a bottle of Retsina, or whatever it is that Cypriots drink. It is a very confusing and malreported story and to say that this so called rescue package has been bungled is putting it mildly. We were initially told that most of the money was Russian hot money from the mob, or wealthy oligarchs hiding it from tax  authorities in Moscow. They were just getting what they deserved. The true story is of course a lot more nuanced but I would like to not get into the details, however interesting. An expat oligarch  losing some spare change is not what gave me the shiver. What gave me the shiver was the connection I made to a report that went viral in the New Zealand blogosphere a week or so   back as reported by Mish Shedlock in his blog. A reader in NZ had written Mish that the Reserve Bank of NZ had announced that depositors could be tapped to bail out the banking system. What was unique was that the NZ Central bank laid it out in clear language to the public. Here is a portion of the text:
"The OBR policy is designed to ensure that first losses are borne by the bank’s existing shareholders. In addition, a portion of depositors’ and other unsecured creditors’ funds will be frozen to bear any remaining losses." BTW, the Bank of NZ does not have so called deposit insurance.
    Today Mish reported that The Bank of Canada  has announced a similar policy. Here is the quote:
"The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital." Did you notice:?Bail in? That is of course bankese for BAIL OUT.!
 Here is the link to that ominous sentence, buried deep in a ponderous report. AS Mish notes, it is on pg 145.
   So depositors got tapped to bail out the criminal ponzi banks in Cyprus. But it couldn't happen here. Right? Wrong. It obviously can happen in NZ and Canada. But in the US? The cradle of liberty. The home of the brave?  yup. It does appear so. I found it rather easily by simple searches of my favorite financial bloggers, among them Yves Smith, Steve Keen, Tyler Durden, and particularly Ellen Brown. 
    Ellen turned up a paper from last December . This was a joint FDIC, Bank of England position paper just restating what had already been discussed   at the G20 Financial Stability Board in Basel, Switzerland. Here are a few choice sentences from that document translated by Ellen Brown:

"An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution."
 Can't happen here , huh? What it says is that one of these TBTF banks can seize depositor assets and convert it to BANK STOCK (!), obviously against your will. You thought you had a nice safe FDIC insured deposit in say the Bank of Amerika. Sorry buster. Now you are a happy shareholder. And bank shareholders are not under the FDIC umbrella.
      Now it just gets worse. If you have deposits in one of these TBTF banks, you might be under the impression that those deposits are your money, assets to the bank, right?  Not quite. In bank legalese, your money is not classified as a bank asset. It is actually a liability. Go figure? It is unsecured debt, and what is particularly evil, it is not senior to a lot of other claims that the bank might have. And guess what is senior to your deposits(oops: sorry: liabilities): Derivatives exposure. These banks have moved their derivatives in effect mingling with your CD's. Here is how Yves Smith puts it:
"The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders. Lehman had only two itty bitty banking subsidiaries, and to my knowledge, was not gathering retail deposits. But as readers may recall, Bank of America moved most of its derivatives from its Merrill Lynch operation its depositary in late 2011. As Bloomberg reported:
Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…
Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
And Bank of America is hardly unique. Bloomberg again:
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show."
    Whew!!! Can it really be this bad? Remember we are dealing with the Big banks and the TBTF Federal Reserve, a cartel of those banks. These banks are called TBTF banks for a reason..
   I have no idea what the likelihood of such a scenario like this occurring. But if in fact savers deposits are in effect, unsecured deposits, then taking these deposits out of these banks seems prudent. And I don't just mean CDs. In the 30's Gold was confiscated by the government and the government already has authority under homeland security to seize safe deposit boxes and confiscate what is in those boxes whether it is gold, silver, guns or whatever. In a bank run or similar collapse scenario, there would not be access anyway.
      The key point to get from this post is that the big banks and the big Central banks are all in the same fraternity worldwide. They are globalized just as the problems are globalized. If it happened it Cyprus, it can happen in Spain, in Italy,in the Commonwealth countries and certainly here in the US, the birthplace of Derivatives. The best  financial strategy  has always been to panic early.

Saturday, February 23, 2013


       Cliodynamics is a new field which attempts to put the study of history on a sound scientific footing. And what do new fields need first? You guessed it. A Muse. Let me introduce you to Clio, the Muse of history. Like all good muses Clio comes to us from Greek Mythology. The "dynamics" part I assume refers to system dynamics which for some reason never chose a muse. This term was coined by Peter Turchin. a professor at the University of Connecticut who is a co author  along with Sergey Nefedov of a book I recently read entitled Secular Cycles.  
       It is a new slant on an old  theory , that of Social Cycles, the notion that history repeats itself in a repeating sequence of dark ages and golden ages, booms and busts. Turchin and Nefedov's achievement is applying a number's based analytical approach to history utilizing a set of variables which they saw as common to eight civilizations they studied from early Roman to late Tzarist Russia. They named this  approach Cliodynamics and dubbed their model a demographic/structural theory. The key variables they emphasized were population, income inequality between elites and commoners, wages and prices, and sociopolitical instability. They called their approach semi-Malthusian. They could just as easily have called it an ecological approach as a good part of their discussion related to carrying capacity of rising and declining populations in the face of disease, famines and wars. They they were looking for patterns in the population and instability oscillations experienced by these eight civilizations. They acknowledged standing on the shoulders of the thinkers and philosophers who preceded them from the 14th century Tunisian Ibn Khaldun, the17th century Neopolitan Giambattista Vico up to contemporaries like Oswald Spengler in the last century. They give particular praise to their associate Jack Goldstone at George Mason University, a sociologist and political scientist specializing in rebellions and revolutions. Goldstone has worked as a consultant to  the Federal Government on a variety of projects dealing with implications of rebellions and instability in relation to US foreign policy.
     Their model described four phases which the civilizations cycled through:Expansion, stagflation, crisis and depression . The time span for a full cycle varied but seems to have been around 300 years. The authors emphasize that their study was of agrarian civilizations but most reviewers and others who have commented on the book understandably jump to the applicability of the model to current civilizations. In their conclusion they address this issue with a variety of caveats including a willingness to modify the model to fit contemporary applications. One highly regarded energy and economic blogger, Gail Tverberg described the phases as follows:


  1. Expansion phase (growth) – Increasing population, relatively low taxes, political stability, low grain prices, and high real (inflation-adjusted) wages.
  2. Stagflation phase (compression) – Slowing population growth, much heavier taxes needed to support a growing elite class, low but increasing political instability, rising grain prices, declining real wages for most workers, increasing indebtedness, and increasing urbanization.
  3. Crisis phase (state breakdown) – Population declining from the peak (typically by disease or by deaths from warfare), high income inequality, political instability increasing to a peak, high but very variable grain prices, high urbanization, tax system in a state of crisis, peasant uprisings.
  4. Depression/inter cycle – Low population, attempts to restore state,  declining economic inequality, grain prices decreasing but variable.
 Clearly Dr Turchin is thinking about the fit of his model to our society. He posted a recent paper this month dealing with this very point. I found a posted graph very interesting which I reproduce here:
Income inequality was a key variable in Secular Cycles. I have corresponded with Dr Turchin on this graphic which by the way was not his. I felt it understated current income inequality which is a subject much in current news and opinion. Clearly US well being is negative and inequality is growing.
       If I were sitting down with Turchin and Nefedov right now I would be asking how their analysis would apply to the  industrial civilization that has blossomed  in the past 200 years. I have spent some time pondering just the fossil energy contribution to the trajectory of our civilization. Energy has been the catalyst that has driven exponential growth in some of Turchin and Nefedov's  fundamental variables such as population and carrying capacity and food availability.Elite overproduction has clearly been magnified by the enormous wealth conferred on oil consuming societies both directly and indirectly. It has certainly fueled sociopolitical instability. The Japanese attack on Pearl Harbor occurred as a response to the US and Britain cutting off petroleum access to Japan. If my catalyst assumption  of energy's contribution holds, how might the variables respond in magnitude, amplification and direction.? Might fossil energy be its own independent variable? And let's not forget the elephant in the room: Globalization. We have an interlinked industrial civilization and if there were to be collapse of one nation, multiple collapses would almost certainly be likely.
        I have found negative comments about Cliodynamics from historians skeptical that there are universal laws underlying social behavior, Many historians consider historical processes non-linear and highly complex and equally skeptical that it can be put on as sound a footing as the empirical sciences
. They point to economics which has tried to emulate and ape the physical sciences by employing complex mathematical formulas and modeling techniques with generally dismal predictive results.  In economics the situation may be improving with the work of Ken Rogoff and Carmen Reinhart looking at 800 years of financial missteps in their book: This time is different:Eight centuries of financial folly. History and economics are pretty closely wedded. Turchin's work is retrospective and correlation is not the same as causation , but some of the correlations seemed pretty stunning. His observation that elite overproduction preceded the crisis phase in all cases is notable. I think it is healthful that Turchin's background as an ecologist and statistician has wafted some beneficial cross pollination into the historical field. Whether it can be transformed into a science remains to be seen. Double blind testing, the gold standard of scientific inquiry, will be difficult.And as Niels Bohr said "Prediction is difficult, especially about the future."

Friday, February 22, 2013

Energy and Empire

       I have spent the past several weeks preparing and boning up on natural gas issues in preparation to be a panelist at a meeting of our local Chamber of Commerce. It went well, was well moderated and we all got our licks in and I hope the audience derived some benefit. I fielded some interesting and penetrating questions both during and afterward. The basic assumptions of the economic community  in our isolated high mountain valley  remain intact despite my best efforts to sound the alarm, Paul Revere style.I have pointed out in numerous articles how tenuous our energy extravagant lifestyle here is in Wyoming and particularly in Jackson Hole. I have pointed out that Frac Gas is a bubble, that Wyoming has the highest per capita energy consumption of the 50 states,  and that our economy has legs because of 500 million years of concentrated sunlight. We have burned through 50% of all the oil that has been drilled here in the US just since the late 80's.That was the high grade ore , so to speak, conventional light sweet crude, most of which looks like Wesson Oil. Now we are into the dirty stuff from tar pits and sand mines and  4 miles under the Ocean. It's there for the taking at much greater cost in declining net energy and environmental degradation. Ominously, Wall Street  is in the act slicing and dicing and hyping and spinning the meme of energy independence  in its latest bubble. The political dominated energy propaganda arms of the DOE, IEA and EIA along with the oil majors are keeping the American Dream alive with deceptive, unrealistic and unlikely predictions of future abundance. The fact that these predictions are from the mouths of the least reliable subset of hominids: ...ECONOMISTS, seems to have escaped everyone's notice. There are a few independent analysts I have cited in previous blogs as well as some percipient bloggers.
       But in some ways, the oil and gas story is not the big story. It is a  part of the big story which of course is The Rise and Fall of the American Empire. This is a subject I have covered repeatedly coming at it from different angles:ecological, economic, fiscal, sociopolitical and primarily from the foundation of the empire:Energy. I have studied other empires, why they rose and fell as far back as the Harappan and Indus Valley Empires to our present American Empire.It is an engrossing tale of discovery, of chance, of ambition and greed and invention, determination and cooperation of all the players.It happened because all the pieces were in place, the right place. At the right time. It took the energy of people, of animals and of slaves to build the foundation for this empire. But it was the Exajoules of a vast store of fossil energy that provided the afterburner that blew the United States past its European and Asian rivals.
       Absent this unexpected energy bonus enjoyed by America, there is every reason to believe that establishment of Empire was in our DNA. There were abundant resources, willing hands, and capital all converging on a new world, free for the taking.We were probably foreordained to become an empire but no empires last. Empire rise. Empires grow, and empires fall. It is the wherefore and the how , the anatomy and physiology of empires that I find fascinating. It is the physician in me that drives the desire to understand this civilization but unfortunately the study of empires, both healthy and ailing, has not been the sort of study that has yielded results with the same degree of certitude present in fields such as physics or biology. That is until now. But we may just have a new tool to study and dissect empires. Are there universal laws operating which explain the trajectory of empires?. There are qualitative assessments of empires rise and falls. But might there be quantitative factors that might explain the same? That will be the subject of the next blog on Cliodynamics.

Wednesday, January 30, 2013

Chaos in Gasland

Welcome to my world, Frackhole, Wyoming. If you're wondering what the roads out here in the West look like, have a gander at this scenic vista of oil and gas trucks as far as the eye can see. Of course there have been many days when the eye can't see very far because of these trucks and the dubious economic benefit they have provided in my little corner of heaven. You know what I am talking about if you happened to be driving through Pasadena California in say, 1956. You see here in Wyoming in the vicinity of the Pinedale anticline or in the little town of Pavillion, we have this little problem with "externalities." as the economists like to term it. Other people would call it air and water pollution, but we term it the cost of progress. Wyoming has been pulling gas out of the ground for a long time but it's only been in the last 5 years that we have had choking  Pasadena smog. Unless you are a underemployed roustabout happy to finally  have a job, or one of  equipment suppliers or camp followers of the oil and gas industry, you might be a wee bit unhappy at water you can't drink and air you can't breathe. On the other hand, you might just decide to "cowboy up" as we say. "This isn't your first rodeo," as we also say. If you ask some of the denizens of Sublette county what they think, you might  also hear something along the lines of "You can't eat mountains," if your job depends upon  those long  truck convoys.
    In this blog, I have been covering energy and economy  issues looking at cause and consequence, and at past and future trends. Out here mining and energy pay the bills while the rest of us go along for the ride,  reaping the benefits, paying no income taxes and sending our kids to good schools taught by well paid and well trained teachers. We have seen boom and bust times before and it's boom now. It's my guess we are seeing perhaps our last big boom. Vast quantities of oil and gas has been exported but we could always see the mountains. On some days  now we no longer can. It's no secret that our politicians  have long since been captured by these resource industries. They take the money and turn their backs and when the citizens hold meetings and complain  that their eyes burn and their children can't breathe, the state tells them to car pool and drink bottled water or call for more studies from non EPA analysts who aren't biased virementalists.
     Now is as good a time as any to get back to why a big reason for the  Pasadena air in Sublette County. I have an acquaintance who is a geologist near Pinedale who said some of his new drilling rigs are using Nat Gas instead of diesel. Where  then was all that ozone coming from? Nat gas is clean, right? So I wondered about the fracking pumps and started digging. It seems they are really huge with very powerful diesel engines on the order of 3000 to 6000 hp. And here is the kicker. They don't frack with one pump. They might frack with a dozen or two linked together in an array. Here is what they look like:

 Boys, it looks like we got ourselves a CONVOY!
 I have not emphasized the negative environmental cost of energy because until this century, it wasn't always that obvious other than a occasional drunken tanker skipper blundering into hard things or the occasional blowout or explosion.  Lately these negative externalities are getting harder to avoid as we go down the backside of Hubbert's Peak going from easy oil and gas to  harder frack gas and shale oil. Now we drill not in good old Texas, home of the Chevy Suburban and longhorns but in  god forsaken deserts in North Africa , the Arctic and deep water Gulf of Mexico. But in the past 5 years with US crude production down under 5 million barrels a day and imports almost 15, the industry decided to go after the hard expensive oil that was left right here in the good ole US of A. Fracking is not entirely new because a screwball in 1920 threw nitroglycerin into an oil well to see if that would perk it up a bit. It did, but the idea of getting oil and gas from tight reservoirs really took off with the first commercially successful venture in the Barnett Shale in Texas in 1998. It is still a very new and somewhat secret technology, not well understood even by its promoters. Some of the early wells in the Barnett and particularly in the Haynesville Shale next door in Louisiana were producing truly astonishing  daily flows with gas pressures approaching 8000 psi. It looked like a whole new game. In mid decade natural gas was $10-13, and . US production of nat gas appeared to be in terminal decline. The government even began permitting LNG import terminals in places like Sabine Pass, LA to fill a looming gas deficit. Companies like  Exxon ,Chevron and Total rushed to get into the next big gold rush. With their financial backing, little known companies like Chenniere were able to line up financing of $10 Billion. Chevron and Total signed long term  delivery contracts until 2029 of $125 Million a year with Chenniere. It has been a disaster for those two with only a single tanker delivery.  Other companies like Chesapeake in Oklahoma City were betting on the domestic fracking technology and were snapping up leases using borrowed money every which way but loose. Wall Street bankers who knew a few things about bubble creating by then, got into the act and began throwing money at any wildcatter with a drill bit and a truck with a frack pump. The boom began as every available rig was rushed to Texas, Louisiana, Arkansas and lately Pennsylvania. Within just a few years the US went from importing 15% of its gas down to only 12%. The early players cleaned up. I even got in, buying Chesapeake at under $20 and saw it rocket to $70. It was deja vu 1920's with everyone doing the Charleston. But then with all this supply, gas started falling, and FALLING, and FALLING until it hit $2 last year. Even well capitalized companies like Exxon said "We are all losing our shirts!"  Today the  spiritual father of this boom Aubrey McClendon, the CEO of Chesapeake, the country's 2nd largest producer of gas, cleaned out his desk and handed in his keys to the executive washroom in downtown Oklahoma City. You can only lose money so long. It looks like Aubrey wont be the last to go. I have covered the fracking bubble for the past year and have pointed out what appeared to me to be the economic insanity of gas fracking with $2 and $3 gas, with each new well costing $10 million and $5000 leases now $30,000. Haynesville was said to be possibly the 4th largest potential gas resource after Quatar, Iran and Russia. That was the hype then.  Wall Street's snake oil salesmen promised huge EURs(estimated Ultimate Return) using a long term production model as they termed it, of up to 65 years,because the flows were so great and the shale formation so big. But after a few years the producers started whispering to themselves that pressures and flows were dropping like a rock after only a few years. In two years some flows were down 80 to 90%. And some of the new wells were duds. We began hearing the term "sweet spots" where production was high. That's where you wanted to drill but knowing where the sweet spots were required drilling where it wasn't so sweet and drillers began burning money as most of the leases were structured as "use it or lose it". And if annual payments were required, cash flow even from mediocre wells was a consideration.               Then in 2009 the SEC put in some new rules which allowed companies to increase their reserves as long as the companies could demonstrate decent production. It had the effect of allowing better access to credit but demanded more drilling. I think you are seeing that we are in a positive feedback loop in which the more you drill, the more you needed to drill.With all this production, prices kept falling. Almost nobody except a few independent analysts noticed. Not the media, including respected organizations like the WSJ, the NY Times, Bloomberg and even the Paris based IEA and the US EIA who chortled on about a brave new world of US energy independence. They predicted the US would be back on top as the world's biggest coal and oil producer as well as a natural gas exporter.  I didn't buy it and some very bright energy analysts didn't either. I pointed out the obvious similarities to the bubbles in tech and real estate. The same Wall Street suits  who brought you  trash real estate derivatives were and are still involved in the Frack bubble. They are even today securitizing gas and oil leases among other products. In a sense, that is what it is about now,  land, not gas.  Wall Street is up to its neck hyping joint ventures, partnerships, asset sales, and stock offerings.They have lately spent a lot of time in China. Even the Hedge funds and private equity guys like the Carlysle Group and Blackstone are in there dealing. It probably wont be long before Mitt Romney smells blood and rushes in to scoop up  the carcasses to slice and dice and sell off.
     One of the indicators I follow is the Friday reporting from Baker Hughes giving the quantity and location and type of drilling rigs nationwide. I have mentioned that the fraction of rigs devoted to gas has been declining pretty steeply and here is the latest graph:

AS you can see our gas rigs peaked in 08 and have been dropping since  like a stone. You can also see that the US rigs are the majority of world rigs but it should be noted that neither Russia or China, nor off shore rigs are represented.  The steep decline in US gas rigs  portends a decline in production at some point because most of those US rigs were frack wells with steep depletion profiles.See above.  I expect production to fall off in the not too distant future, especially if gas prices remain unsustainably low. There are a lot of big players who are banking on low  gas prices and increasing production as a keystone of their business models to set up petrochemical  and fertilizer plants, nat gas filling stations and LNG Export terminals. There are politicians on all sides who want to see it happen despite the obvious  business conflicts. I see it as very interesting and a subject of a future blog.

Wednesday, January 23, 2013

Energy Investment Tip vs. Time to rethink CNG?

     In the last several posts I have addressed the wisdom of switching to gas as a transport fuel. The boosters of this switch are infatuated with the low gas prices  compared to oil and the media's insistence of assumed abundance in gas resources  as a reason to retrofit our car and truck transport to CNG. Simultaneous with this push is a push by industry to try to get their trapped gas to the world market. I have pointed out that these two opposing directions could guarantee a collision in the future. I have pointed out that the assumed abundance of  cheap gas is a sham argument based upon my assessment of price, current production and projected future gas production. I have hammered home my firm contention that gas prices are too low for producers to make any money and that ultimately production will have to drop and prices will have to rise and if and when gas prices rise, the big spread in prices between the BTUs of oil and gas will narrow, and the more it narrows, the less potent the argument for a switch to CNG for transport fuels becomes. My opponents maintain that gas prices may rise but so will oil prices, and presumably the spread will remain. I say, don't count on it, Pard and in the past 6 months I have put my wallet where my mouth is and I have added to financial positions in gas as a resource investment. I remain cautious on most of the producers themselves because I am not interested in a business in which they are all  losing their shirts. My opponents cite only faith based reasons for their beliefs while I, being a numbers guy, cite data to bolster my beliefs. I have  pointed out that for example, that Bakken oil production has dropped for the first time in about a year and a half as well as rig counts. Promoters say, not to worry. It's about increased efficiency, maintenance issues, infrastructure bottlenecks, ground blizzards in Williston ND and so forth. Production is bound to shoot up when these little nagging minor problems are fixed. I am not so sure. Meanwhile in the Bakken, methane farts are wafting over the rigs as NG is still being flared into the atmosphere as the Bakken does its part to melt more glaciers in Greenland. I watch the ND production website as well as the excellent Baker Hughes worldwide rig counts which I highly recommend to any serious energy watcher or investor. The numbers from Baker Hughes this month are sobering. It is instructive to study where the rigs are changing and here are some graphs that you need to see.
  USA_riggcount_2012_Oil_Gas  Links

This graph shows the shift from gas directed to  oil directed rigs here in the US. You will note that not only are rig counts dropping for oil and gas but gas rigs are dropping faster than oil rigs.

The next graph shows the type of drilling rigs and their relative proportions. Be advised that horizontal rigs predominate in the shale oil and gas  fracking fields.

As you will note, rig counts have dropped over 10% in the past year. The Baker Hughes site records 2008 rigs last year in North America and 1749 now. North America has  2/3 of the world's rigs.
Also keep in mind that fracking wells both oil and gas have stupendous depletion profiles after the first year, unlike conventional vertical casing wells drilled in more porous gas fields. This means that the only way to maintain and increase production is to drill more wells year over year. This is clearly not happening. If I am right and that this marks a turn in gas prices, that will be good news for gas states like my native Wyoming who depend upon energy royalties. IT could be good news for my natgas investment portfolio. This statement in no way constitutes investment advice because I have made and lost large sums investing in energy but I took the dive  under the assumption that gas would rise. I also was bottom fishing when gas was near $2.
      I would also like to draw attention to this article from Bloomberg about falling  daily shipping rates for the LNG tankers plying the world's oceans. There had been a slight shortage of these ships but the shipyards are pumping them out and supply and demand is getting into line. Mind you these ships are about the only positive cash flow ships out there and if I were a gas producer, I would conclude that it is now time to gear up my LNG terminal with some assurance that there will be ships to carry it. This is potentially yet another nail in the coffin to those pesky low NG prices.
 I would like to give credit to Kjell Aleklett and his excellent energy website:Aleklett's Energy Mix

Friday, January 18, 2013

Natural Gas Chaos: Part 2

    I recently did a guest editorial in the Jackson News and Guide, our  fine local paper  in which I commented upon the wisdom of promoting  and subsidizing a NG filling station in Jackson. The paper also quoted me during a phone conversation in a recent follow up which was accurate, as well as from the promoter, Dennis Lamb, John Willott a retired Exxon Senior Vice President, and Keith Phucas of the Wyoming Liberty Group. In the letter I tried to present the economics of NG as a transport fuel  by providing hard concrete data and I did not touch upon other important aspects of NG and energy production such as pollution from emissions and contamination of water supplies, and NG bubble economics etc.  I have covered some of those aspects in this blog in the past. In this post I would like to add some detailed supporting data along with tables and graphs which were not feasible in my  compressed guest editorial.. I will provide references to support my data and conclusions within this post and at the end as well. I caution the reader to be circumspect and skeptical of all presented data whether from me or any other source and to do due diligence before reaching their own conclusion. I would urge the reader to rely on independent assessments and audits which is what I try to do.
       Dennis Lamb was quoted as saying "Anytime you can get an alternative fuel source that has 10% of the toxins emitted for half the price, it's a win-win." I certainly have no idea what this incoherent statement refers to.  Pulling statements out of context is often unfair and discourteous, but I am puzzled nonetheless. What toxins is he referring to? Half of what price and where?  The two nearest CNG stations to Jackson are in Riverton and Rock springs and the current price is $1.96  and $1.61
respectively. I am under the impression that these prices do not include fuel tax. Prices in the nearest metro areas of  and Denver  range  from $2.33 to $2.80  and appear to be just ove $1.30/ gal in Salt Lake. The  10% toxins part of Lamb's comment if that is indeed what he said, is mystifying.  Promoters of NG like to state that NG is the cleanest fuel of the big three but that is misleading. It is true that there is somewhat less CO2 emitted per BTU of NG when burned at the source.. Here is a link to a  graph of emissions of the three energy fuels and their relative emissions over a 20 year period. The graph shows that shale gas emissions exceed emissions from diesel, oil,  and coal.  Another important fact to remember is that methane is 105 times more powerful than CO2 as a greenhouse gas. Hence the worries about the methane hydrates in Siberia which could be released by Global Warming. All fossil fuels contribute to global warming and NG is no less a culprit than coal or oil if you believe this power point presentation. I fail to see  the win-win situation as promoted by Lamb. Looks like  win-win if Lamb obtains free taxpayer funds and lose-lose for the rest of us. Which brings up the point of subsidies. How much subsidy did Bob Shervin receive when he built his Sinclair station just up the street from where Lamb wants to site his? I haven't talked with Shervin but if the taxpayer is going to subsidize Lamb, then I think Shervin and the other station owners deserve the same subsidy, even if it has to be given after the fact.
     I would now turn to the supply side of the argument in more detail which I briefly covered in my earlier post. Willott seemed to agree with me when I said there was a 11 to 23 year supply of NG and then  he added that "some would say it's more than 150 years of supply." There is no one credible who is saying any such thing. John flipped from reserves which are  economically recoverable  to resources which are not at current historical prices. In fairness to John, the NG resource base world wide is probably huge especially from Alaska and Canada through Siberia not to mention worldwide deep water gas resources. Nobody has surveyed Antarctica which almost certainly has a resource. But again:think Reserves not Resources! Could these enormous resources be tapped as John says? Of course they could, but they are not affordable. It's the same for coal resources. They are huge but the reserves of affordable coal are not. There of course is no concrete number of affordability of an energy resource but at least in the case of oil, when the per barrel cost gets much above $100, the world economy gets cranky. The at times  deceptive statements from the energy promoters almost always ignore the concept of net energy. If a resource is so deep or so distant that it takes as much energy to mine it as the energy you get out of it, then it is for all intents and purposes a resource that will never be tapped. This is the fraud of the   Green River Oil shale formation in Wyoming, Utah and Colorado. It is not  even oil, but waxy kerogen locked in rock and if it were recoverable as oil it would be  the largest  fossil energy source in the world. But remember: Economically recoverable and net energy recoverable. It is not now economic and never has been. Remember: It takes energy to get energy.                                              Let's return to gas.The next graph is a  credible estimate of how much gas we have. It is from 2011, I believe and will soon be updated. It was prepared by the the Potential Gas Committee(PGC), a quasi  independent group representing the industry. The numbers are in trillion cubic feet:
The key numbers to look at are the Proved Reserves and the Optimistic reserves. There are 11 years of proved take it to the bank gas you can count on and optimistically(whatever that means) another 11 years. this is at current consumption. I will caution the reader that these numbers jump up and down as gas moves from resource to reserve category and back, but I think it suffices for planning purposes for individuals and governments. You also see probable resources, some of which could be developed at the right price.That is a key point to remember. Very little of that category will come out of the ground at $2 or $3.  I will reiterate, the US IS NOT ENERGY SUFFICIENT in NG now and hasn't been for ages, and if companies like Cheniere  which is completing its liquefaction facility in Sabine Pass LA have their way, the US could be exporting $3 US gas to a world which is paying in the mid $teens. BC plans to build a similar facility at Prince Rupert for Asian export. Once this trapped gas has a chance to escape to world markets to trade like oil and coal, I'll give you 3 guesses what will happen to NG prices. If you are an oil and gas producer in trouble  like Chesapeake, it can't come too soon. That's why I find it peculiar that John Willott thinks gas prices will stay low. Now lets take a detailed look at gas production in a few selected states and nationwide. I will show Wyoming's numbers  along with the total US production:

 Please note that this includes conventional and frac production, The bottom graph can be enlarged to tease out the various large producing states. You will note that production in all states with the exception of LA are flat to declining given the low NG prices. But I concede if gas were to recover to say $13 which it was a few years back, you would likely see these graphs turn up.
    I also must again state that if gas  were to stay this low as John expects, I can guarantee bankruptcies or buyouts in the gas sector. John's boss, Rex Tillerson was asked in testimony before the Council of Foreign Relations last June 27 how Exxon was coping with the low NG prices. Here is an excerpt from his testimony as reported in the Wall Street Journal:
NEW YORK—-Even energy titan Exxon Mobil Corp. is showing signs of strain from low natural-gas prices.
On Wednesday Exxon Chief Executive Rex Tillerson broke from the previous company line that it wasn't being hurt by natural gas prices, admitting that the Irving, Texas-based firm is among those hurting from the price slump.
"We are all losing our shirts today." Mr. Tillerson said in a talk before the Council on Foreign Relations in New York. "We're making no money. It's all in the red."
His comments mark a departure from remarks made earlier this year on how lower natural-gas prices hadn't yet hurt the company because of its operational efficiency and low production costs.
      It should be noted that Exxon/XTO is the biggest NG player and wants to get its gas into LNG ships where the real money is, ASAP .  The idea that the US should keep its gas at home to keep US energy prices low and promote jobs in the  domestic Fertilizer and petrochemical  industries apparently hasn't crossed Rex's mind. Rex like all corporate titans cares only about Exxon's bottom line and making money for EXXON and the shareholders and if he get's his LNG export terminals, he will be making money in spades.
     Now let's take a look at how these low NG prices are killing the producers. Art Berman, an independent analyst in a recent paper noted that $22 Billion/qtr is needed to maintain domestic NG supply. Cash flow of the 34 largest producers is only $12 billion a quarter which of course leaves a deficit of $10 Billion/qtr!
With losses of this magnitude there is no such thing as retained earnings and so companies like Chesapeake and others have been selling off assets and seeking joint ventures or assuming more debt to keep the party going. Berman's source was the highly respected Calgary based Energy Player, ARC Financial . Here is their graph:
I leave it to the reader to draw his own conclusions on the feasibility, affordability and future of NG as a transport fuel. It certainly can be done and is being done and if individuals and investor groups want to proceed, I say more power to them. As a libertarian, I am opposed to taxpayer subsidies for them because it benefits one group and harms others. Based upon my research, I would say that there would be no benefit to switching from oil to NG for transport here in Jackson.
As a disclaimer I have  both short and long financial positions in many  North American energy producers and pipelines including Exxon. I have no intention of converting my car or truck to CNG.


Andreoli, D., 2011, The Bakken Boom - A Modern-Day Gold Rush. The Oil Drum:
Berman, A.E. and L. Pittinger, 2011, U.S. Shale Gas: Less Abundance, Higher Cost. The Oil Drum:
EIA Annual Energy Outlook 2011 Early Release Overview.
EIA Annual Energy Outlook 2011 Natural Gas Tables:
Gilbert, D. and R. Dezember, Chesapeake Energy Pulls Back Amid Natural-Gas Glut: Wall Street Journal, January 24, 2011:
Potential Gas Committee 2010 Report:
And of course my previous blogs on the same and related subjects.
Hugh Owens MD Jackson Hole 2013

Thursday, January 17, 2013

Getting High

Yesterday I strapped on my snowshoes and decided to get high. We here in Jackson Hole have been the victim of deeply subzero  inversions lately and the lower you are, the colder you are. The fastest way to warm up is to climb up, which has the additional benefit of getting into  vastly clearer air. Normally my wife and I  put on cross country skis but if you want to ascend steep snow covered slopes, you can't beat snowshoes.  So I took  the opportunity to hike with  a naturalist and a botanist, Andy and Amy, over on the West side of the Tetons across from a small ski area. The air above 8000 feet was bracing and clear with hoar ice crystals  glimmering and wafting like fireflies off towering firs and spruces. The sky was a stunning cobalt blue, never so blue in summer which is the season we usually hike the Tetons. Not even a whisper of wind. We remarked on how effective the snow and trees were in snuffing out all sound except the occasional chirring of a squirrel or the chick-a-dee-dee-dee of that ubiquitous tiny black capped resident of the high mountains. Andy showed us pine marten tracks in the deep snow, an aspen tree clawed by bears and a huge downed tree where a bear had denned up for the long winter. The view from the top took in the distant Snake River Plain far below. It was for me a great escape from thinking about the ravages of energy extraction , environmental destruction and exploding  urban populations. I had a lot to think about on the drive home which will be the subject of a future blog.

Wednesday, January 16, 2013

Robots or Jobs

Perhaps you saw the "60 Minutes" segment last week entitled"Are Robots hurting job growth." It was an eye opener for me and it showed the sudden inroads of robots into the American economy. Most of us are aware  auto manufacturing uses robots  but I was unaware of the capabilities of the new robots with eyes(video cameras) and brains(Artificial Intelligence) and phenomenal hand eye coordination, so to speak. Philips Electronics recently moved its shaver assembly business from China back home to the Netherlands. A lot of Chinese jobs were lost but few Dutch ones were created. Watching the speed and dexterity of the shaver assembly robots  made me realize that these new robots were not your father's Oldsmobile.Some of the robots in the new Tesla factory in California can even multitask. They are particularly adept at managing,  transporting  and shipping inventory in distribution centers but their capabilities extend beyond manufacturing and assembly line jobs to information gathering technology and health care. A hospital in California has a fleet of them that deliver patient supplies, meals, lab tests and even fill prescriptions! They are increasingly used in in industrial agriculture in packaging and shipping and it takes no imagination at all to conjure up jobs and even professions that can be outsourced to robots.70 % of Stock  transactions are computerized HFT robotic trades, if you will. Who needs airline pilots? The planes can takeoff and land unassisted already, which are tasks much less complicated than the Google self driving car in traffic. The new Boeing 787 is entirely electric, no hydraulic pilot controls, a perfect fit for Cap'n Robot. Other examples that come to mind  are Amazon, UPS?FedEx, fast food preparation, big box store stocking and receiving and in my field, performing certain types of  surgery and surgery assist. I recently had  prostate surgery performed by the Da Vinci Robot. It turned out fine. I'm alive to blog again.  60 Minutes asked two MIT professors whether robots killed jobs and their answer :"That's the $64000 question." They proceeded to answer it in the affirmative.
      In the recent past,  economists have stated that technology kills old jobs and creates new ones by increasing so called aggregate demand as a result of increasing productivity and falling prices. But this seems to have ceased with robots who are fast replacing wage slaves with robotic slaves who can work 24/7, don't complain or unionize, don't need pensions or healthcare or get injured and require disability settlements. If you're a corporate CEO who cares only about the bottom line and getting rich off slavery, what's not to like? OF course the real $64,000 question wasn't asked: What happens when all work is done by robots?  There are  obviously profound societal and economic implications but that's TV journalism for you. It isn't called the boob tube for nothing. The show did not go unnoticed by the Robotics industry who have filled the internet with rebuttals asserting that technology and robots create jobs.Right.Some recent political figures remind me of robots. Like that guy who ran against that other Hawaiian/Kenyan fella? If he wasn't a robot I'll eat my Vise Grips. I'm digressing..... One of the main themes I hammer repeatedly in this blog is that the reader or viewer must always remember the role of bias in any argument so absent irrefutable supporting evidence, I will regard such industry rebuttals as suspect. I also find it curious that no political figures have stepped up either supporting or decrying robots. With 9% approval, perhaps the Congress fears wholesale replacement by robots. Robotic replacement of  some of the workforce has profound implications for the world and the paucity of articles and news on the subject is disturbing. I can think of dozens of questions? Do robots pay taxes? Specifically payroll (Social Security!)taxes? Income taxes, sales taxes, VAT?  Like all slaves, I assume that to be a negative. Slaves also don't consume or purchase the fruits of their labor. If our workers are robots, who will buy those shavers and Teslas.? If the US is returning to manufacturing using robots, wont China and other countries be doing the same? Jobs returning to the US? Don't bet on it. Robotics  is globalized and the Tesla robots for example are made in Germany.. Terry Gou, the CEO of Foxconn who is notorious for his electronics sweat shops making Apple products has announced that he has already purchased robots and plans to replace a million workers with a million robots within 3 years! He currently employs 1.2 million low wage Chinese workers. AS of 2011 I read that China already has 75000 robots and we know that Chinese engineers should have little trouble designing or pirating and manufacturing a robotic workforce under their totalitarian capitalistic system. Just tell those million peasants to return to their villages. No problem. The whole  dismal dictionary of the dismal science may need rewriting and rethinking. Let's start with capital and labor. What are robots?  Capital or labor? The industrial revolution was about machine tools replacing hand tools, with machines doing the work formerly done by people but until now machines had not had the potential to replace most or all of the labor force. Of course like any good slave labor force you will need overseers and guards and perhaps even mechanics to repair and maintain the robots but it would seem that even those jobs could be outsourced to robots. It would seem obvious that the displaced workers just might not take all this lying down. Income disparity is already vast and  keep in mind that a slave labor force collects no wages and pays no taxes. All the money will be returned to just a few company elites and their investors and the banks. What will we non robots do if robots have all the jobs except for a few engineers who design and oversee robots? Watch NASCAR? College football? Who needs thousands of colleges preparing students for jobs when there aren't many jobs? I don't read much sci-fi but it seems  the only way to imagine such a future. My guess is that we have here a recipe for revolution what with all those semi automatic weapons and 30 round clips being snapped up at Wallmart. It would seem a good time to look at the Luddite Revolution  2 centuries  back in an upcoming blog.

Thursday, January 10, 2013

Natural Gas Chaos

Here is a copy of  a letter I sent to our local paper in which I commented upon a proposal to open natural gas filling stations in Jackson:

Natural Gas for Transportation in Jackson?

Energy independence for the US is a hoax. Whoa Pard. Aren’t you coming on a little strong? Even the President has told the country we have 100 years of natural gas supply from its reserves? With numbers like that shouldn’t Jackson be converting its vehicle fleet to NG? Were it true, a case could possibly be made to do so. But it is not true. To start with, the US is nowhere near energy independent in Oil or Natural Gas(NG) even now with the glut  of the past 3 years. The US as of last year still had to import 12.7% of its NG. For the previous 20 years, that average was 15.7%. Doesn’t sound like energy independence to me.  It is essential that as citizens we understand the terminology of energy. Obama was confusing reserves with resources. To be a reserve, the energy must be commercially producible. A Resource may have production potential at some price, if it’s there. A resource is subdivided into 3 categories of probable, possible, and speculative. The US does not have 100 years of reserve NG. It has somewhere between 11 and 23 years of reserves at current consumption.  It may have 90 to 100 years of NG resources, but Resources are emphatically not Reserves. Remember to be a reserve it must be commercially producible. US production of NG peaked in about 2009 and has been flat ever since. Most of the traditional gas fields in the US with the exception of Louisiana and the insignificant Marcellus Field in PA are in decline, and that includes Wyoming which accounts for only 8 % of US production. US rig counts as reported by Baker Hughes are in decline as well. There are several reasons for this chiefly the very low price for NG for the past few years hovering between $2 and $4 which for most fields is way below break even. Goldman Sachs a few years back made a presentation trying to lay out the profitability of rapidly depleting Frac Gas fields and concluded that depending on the field, a minimum price of $6 to $8 was the level of profitability. A major reason why frac gas is still being produced is because the companies have shifted their rigs to the fields having both tight oil and tight gas. The oil is still profitable and the gas is merely a by product of oil exploration and drilling. In a few places like SLC, a driver can buy gas for the equivalent of $1.25/gallon but if gas prices return to a profitable level that price will likely be at parity with gasoline. Do the math and see if that $5 or $10,000 conversion cost makes economic sense to you or to your commercial fleet. If you get say 20 mpg and drive 12000 miles a year, you will use 600 gallons/yr. At current gas prices in Jackson just below $3/gal, you spend $1800/yr. If you pay $1.50 for tax free NG, that would be $900/yr. Looks like payback is around 10 years if the price differential between gas and gasoline stayed the same which if you believe my numbers will be highly unlikely. Once gas prices return to a level of profitability, that differential will disappear. A nationwide conversion to NG for transportation is unaffordable for a country running $1 trillion plus deficits.  The gas industry is begging for yet more subsidies from the Federal and state government including agencies like the Wyoming Business Council. If the City of Jackson makes the mistake of converting its vehicle fleet to NG and when prices hit parity, it will be the citizens who are stuck with the bill. If a group wants to purchase equipment and a station, by all means let them, with their own money at their own risk, and not the taxpayers of Jackson or Wyoming.
Partial list of sources for this essay:
Regards, Hugh Owens MD

The thoughtful reader of whether we can or should make a  jump to an alternative form of energy use for transportation needs to know far more than the price differential between gasoline and CNG prices in Salt Lake City. The single most confusing issue is how production and consumption and prices are reported in the media on all the fossil fuels much like the economic  and job data that is dispensed from the government. I have spent a lot and I mean a LOT of time sorting through often conflicting numbers and the data is often  if not usually in conflict. So get used to it. There will be bias reported depending upon who is reporting. For example an investor group or an investment bank may report statistics tacitly designed to encourage and reassure investors pointing out a bright investment future for their particular product. You will find differing numbers reported on production and consumption even between the international agency, the IEA and the US agency, the EIA. If you go to these  agency websites you may wear out your computer mouse trying to tease out what you are looking for. If you go to industry sites like the API(American Petroleum Institute), you are likely to be served up optimistic and rosy data which I generally regard as suspect unless I can find verification from other sources. For example if you are worried about the negative side of fracking for oil and gas,you might as well forget the  corporations and their lobbying arms. If you  read their company releases you will read that frac wells hardly ever leak or contaminate water supplies and that fracking is the new energy nirvana for the United States leading to more jobs and companies returning to the US because of low energy prices.  You will see the usual cliche buzzwords like sustainable and common sense approach. When I see terms like these I know that they really translate to unsustainable and idiotic. For example, you will rarely see any mention of the negative aspects of fracking for gas or oil and its possible contribution to global warming. Methane is many orders of magnitude worse than CO2  in its contribution to global warming and I rarely see articles dealing with whether gas wells leak methane to the atmosphere. Of course they do! Anyone who lives in my state anywhere near the Pinedale anticline gas fields knows they leak. I have driven there in quiet winter days when my eyes burned so bad I could hardly see the road. I once stopped for gasoline in Pinedale and complained to the station about the smell and the smog and the cashier smiled and said"Ah...the smell of money!". The thick ozone cloud in the area has many causes besides leaking frac wells. Diesel pumps power the rigs and the frac injection pumps and my Toyota pickup is also a small part of the problem. The tragic fact is that no one knows how many wells leak and how much and you can be sure that the industry will under report it. There are a few good reports on the problem like this long monograph from  Schlumberger about 10 years ago. What alarms me is that I haven't been able to find a credible source of how much the new fracking techniques of horizontal drilling involving numerous long laterals arcing out from a single pad because the old studies largely involved cemented vertical casings. Fracking doesn't involve intact cemented casings in the entire drill path. It fractures the rock far distant from the main drill bore. There is no easy way even for the drillers  to know how much or how often methane finds its way up existing rock cracks or into adjacent aquifers. In the largely unregulated get rich quick wild west environment of the big frac basins, the big players know better than to open their mouths. In the state of Wyoming our  captured regulators have been loathe to say anything negative about the oil and gas industry. When the citizens complain about burning eyes and getting asthma because of the gas smog, the state doesn't restrict drilling or issue cease and desist orders to the drillers. Instead  they recommend that all parties should cooperate and car pool and drive less.
  The second main point I would like to point out to individuals or governments contemplating a shift to alternatives to oil like CNG cars and trucks is to be aware of the unregulated and uncertain supply picture for natural gas. There is also no national regulatory body controlling gas production like there was for oil back when the Texas Railroad Commission was calling the shots for oil production in order to ensure stable prices and lower the risks for destructive booms and busts. I have looked long and hard and have been unable to find out how much gas is available and produced  purely as  gas plays. USGS does break down gas by type and origin.  The current rig count reported by Baker Hughes shows that about 2/3 of current wells are oil and 1/3 gas but even that is a bit misleading. All manner of hydrocarbons come out of these wells. There is oil in gas wells and gas in oil wells. Gas prices are so low that  the oil and gas industry is still flaring  gas to the atmosphere. This is rarely reported but the industry continues this abominable practice. Some of the oil drillers do try to recover this gas and re inject it to help the oil rise to the surface but injection pumps cost money as do laying gas pipelines. Methane is being flared in the Bakken and the Eagle Ford tight oil fields today as recently reported in the Oil Drum.I have read that more than 30% of gas is as a by product of oil fracking.   I mentioned in my letter that gas prices are below the cost of production. If that is the case why would the drillers not just cap the wells and wait for better prices? I wondered the same thing and found that even with the low prices,the producers have to maintain cash flow even if they are losing money because cash flow services their loans, keeps investors happy and people employed. Some of the early gas fields are of course actually still making money because they  were first to the game and collared low price leases and with the high gas prices 5-6 years ago were able to hedge their production. But one must keep in mind that these producers can only lose money so long. They are hanging in as long as they can hoping for a rebound. There are many events that could trigger that rebound. If the current recession deepens and oil demand and oil price drops as some predict, oil fracking could drop below profitability. The recent cancellation of the Bakken Express pipeline could have occurred for many reasons but ultimate  frac oil profitability and amortization of its cost must certainly be factors. Crude oil trades freely on the world market and is generally easily  transported but North American gas is largely trapped. This is the main reason that the gas producers are lobbying hard for export  LNG terminals and pipelines to let this trapped gas escape to the coasts so it can be loaded on to LNG Ships destined for Asia and European markets where the current price is many multiples above the US price. Just yesterday Transcanada obtained permission to run a  6 $Billion pipeline to Prince Rupert BC to supply Asian markets. If you wonder why a country like the US  which is not energy independent in natural gas should be exporting

 gas, you are to be forgiven. That's why you see so many conflicting and obfuscatory media reporting like" Fertilizer and petrochemical companies are considering returning to the US to  take advantage of low price natural gas," or T Boone Pickens begging for government subsidies to convert the US car and truck fleet to CNG. The companies know that the surest way to high price natural gas is to let it escape to the world market where it will trade closer to the BTU content of crude oil. If it were, gas would be priced over $15 and that is the kind of price that would put a smile on the face of Aubrey McClendon, the CEO of Chesapeake, one of the country's big players. It is also the kind of price that would kill CNG cars and trucks, so something has to give. You can't have both.
      If the reader is wondering where I come down on the side of NG vs gas for transportation, I would say NEITHER!  I would like to see the country moving away from car and truck transportation of people and cargo and moving to a "fuel" that is sustainable and vastly cheaper: Electricity!,which can be generated from darn near anything, including Wyoming gas and coal. The level of public and private debt in this country is such that there is no way that a new gas pipeline/filling station infrastructure could be constructed from scratch when the country is too broke now to repair its roads and bridges. The uncertainty about price and availability of Natural gas in my opinion  absolutely militates against a switch from gasoline to gas by anyone but most especially by my local government or utility if they are going to fund it from my taxes and utility bills.
     If the reader is interested, I have covered this subject in more depth in previous posts last year.

Tuesday, January 8, 2013

The Wealth of Nations, revisited

I have not been riding on my trusty horse Blog for reasons obvious to anyone who lives here in this beautiful valley in NW Wyoming. There are a lot more enjoyable ways to spend what little time we have than sitting in front of a computer screen. The long string of subzero days and nights has unfortunately driven me back to my mancave and I have been mulling over a fundamental concept. What is wealth? From what does it derive? Is wealth money? Is money wealth?
     This little digression started with a comment by my son some time ago when he noted a pundit commenting that so many $Trillions had “vanished” in the latest downturn. This puzzled him, so he asked me “Where did those $Trillions go?” It was an intelligent question and I tried to explain the disappearance as part of a general “deleveraging” of wealth assets going on over the world. Money isn’t” wealth”, I told him. Money is a symbolic representation of wealth. I knew I wasn’t getting through to him when he insisted that if it was money, it had to go somewhere! His perception was that money and wealth were equivalent, which would be true if our money was a denarius or a Morgan silver dollar, or a $20 gold piece. Unless money was in a cask on a Spanish Galleon going down in a hurricane off Hispaniola ending up with the scallops, when one person lost money, another probably received it, a zero sum transaction, voluntary or not.
       This conversation became a loop in my head leaping down axons to dendrites as I mulled over the concept of wealth from a myriad of standpoints. It’s impossible to escape money, the economy, and economic statistics on the state of the economy flooding us non-stop from a media obsessed with economic news.
      I fled as a participant in the Sickcare industry some years back and I have been spending a good part of my time catching up with my education that was interrupted by too many years learning the medical trade.  I particularly wanted to study the dynamics of civilizations, their rise and fall, and how our civilization has changed our world and how our changing world has altered our societies. I began at the beginning with the Big Bang and ambled cosmologically taking side trips into physics, astronomy, and geology, hop scotching  forward and backward and into side alleys that looked interesting. As I examined the whole span of human history, what stood out to me was the period after about 1750, which happened to be the the nascent industrial revolution as  the premier innovation of the past 350 years. Within this revolution have been other important innovations starting positive feedback loops helping to sustain and accelerate the changes which began the Industrial Revolution.
But what has this got to do with wealth and money?? Coinage had been in existence long before 1750 to facilitate trade and commerce and economic growth. Why is there so much more wealth in the world now than in 1750 and will  wealth continue to grow exponentially in the same way  going forward?
     There were prominent thinkers at the time taking note of the changes, among them Adam Smith who published “The Wealth of Nations”, widely regarded at the bible of modern classical economics. Smith was by no means the first to think about economics. There are a scattering of economic writings as far back as Aristotle  but Smith’s achievement was  in laying out terms like capital and labor and land and how they intersect to influence an economy. It is no coincidence that the term capitalism came into being as the system that most adapted to the industrial revolution in the West. Capitalism of course existed well before 1750 to facilitate trade and grow a nation’s wealth and influence and in  it’s ancestral form was termed Mercantilism which followed the feudalism period of the middle ages. But let’s get back to wealth. There certainly was a lot of wealth before 1750. Wealthy civilizations existed in the Mesopotamian and Harappan and Aztec and Mayan  Civilizations. The Romans, the first big Empire possessed enormous wealth. How did they accrue it? In the case of the Romans, they largely took it from their neighbors. . There was wealth, then as now, concentrated into few hands. Keep in mind that by the time Christ was born, there were probably only 300 million people in the world. By 1750 it had about doubled. By 1900 the number had more than doubled to 1.6 billion and the doubling time up to the present has been getting shorter and shorter. Why did it take so long to double the first time, 1700+ years, and why has the doubling interval grown ever shorter? Could the industrial revolution have had something to do with the exponential population boom? Up until the industrial revolution population growth was largely linear but after the industrial revolution the curve leapt up resembling a hockey stick, the classic yardstick of exponential growth. About 1750 a lot of things beside population also started growing exponentially, in this case Industrial Capital, industrial machines, energy production,food production, and, wealth production.  An intelligent observer should always be wary of the classic trap that association is not necessarily causation. I found early on in my quest that I had to ruthlessly simplify, in much the same way that Occam’s Razor is used as a technique of understanding a complex system. The Razor states that all things being equal, the simplest explanation is often the best. This notion did not start with Occam and in fact goes far back to Aristotle and Ptolemy. So I put the origin of wealth creation into the simplest form: You need a resource. You need people to harvest that resource and accumulate that resource. If the harvest involves picking up or digging the resource, all able bodied people are equal and the harder you work, the more resource you accumulate. It takes energy to harvest a resource, in this case human energy. The next logical step was to find ways to speed up the harvest. Get more people into the act but don’t let them keep the resource. Time to invent Slavery. Animals were used as well because they possessed a lot more energy than people. Thus we now have energy from labor combined with a resource. Let’s say that this resource is copper and perhaps other easily accessible metals. Early on, people discovered some nifty uses for soft malleable copper. It made a nice plate, and decent tools. Someone discovered that if you combined a soft metal like copper with another like tin or zinc, and melted them together, you could get a much harder and stronger tool by taking the energy of fire, the energy of a tool maker and producing something with value added above the value of the resource  itself. Thus was born the Bronze Age. The clever tool and plate makers found ways to make their tools better and faster and trading them for items the toolmakers needed, maybe livestock or firewood or perhaps pretty stones for the toolmakers wife. It didn’t take long for early prospectors to find other metals that were beautiful as well as durable and portable, like gold and silver. The toolmaker could trade for these and accumulate a pile of nuggets. Let’s call this capital. Whatever the resource, if a person could take his ingenuity and his energy or that of a slave to add value to a resource, he could then sell it for capital. Some of these early capitalists then made just the accumulation of capital their goal. A faster way to accumulate capital was to steal it, a little risky but a whole lot easier. With more capital one could even hire his wife’s dim witted burly brother to do his stealing. Find more knuckle draggers and maybe some smart officer material and cut them in to a little of the action and you now have an army who can steal on a bigger scale, again a whole lot easier than honest work. This in fact became the basis of the Roman Empire, stealing the wealth of all their neighbors and putting the vanquished to work making and growing things to send back to Rome. This worked real well for a long while as long as there were lands and peoples to conquer but eventually the Roman armies smacked into the law of diminishing returns and long supply chains. There were some pretty tough characters to the north who had little of the wealth that the Romans wanted but who could acquit themselves pretty well on their home terrain like the Teutoburg Forrest on the banks of the Rhine which ended  for good and forever Rome’s push north. Worthy opponents sprung up like Hannibal who used cavalry tactics and elephants to defeat much larger Roman Armies in the Punic Wars. Hannibal by the way, utilized some really unusual tactics besides Elephants like catapulting baskets full of poisonous snakes onto the enemy ships! By the end of the fifth century it was all over and a thousand years later only livestock grazed on Rome’s Palatine Hill overlooking what was left of the Forum.
   Over the next 1300 years as world population increased slowly, forests were cleared, crops were planted and towns were built mostly by hand or with the help of draft animals. Wind and water power was utilized early on for transportation as well as in grain mills. The energy for heat and for iron manufacture came initially from wood and charcoal and gradually migrated to coal, a more concentrated form of energy. The invention of the steam engine was a crucial first step helping to kickstart and then drive early  industrial production. The first primitive models were used to pump water out of the coal mines and then as water pumps generally. Improvements by James Watt and others added efficiency and with modifications to produce rotational torque, steam engines were used to power all manner of manufacturing machinery and as motive power for tractors, ships and locomotives and eventually electrical power generation. Today steam turbines generate the bulk of the world’s electricity. It’s crucial to keep in mind that it isn’t steam that is creating this seemingly limitless energy. It’s concentrated carbon in the form of coal, gas and oil that provides the energy to generate steam and what a vast ocean of energy it has been. It is the existence and consumption of  vast almost FREE energy sources that has powered and empowered the industrialization of the world. Fossil energy is viewed as income to the industrial world, fuel to the industrial machines, a magical powerful force that when channeled into man’s machines has displaced the work of millions by virtue of its concentrated energy. One barrel of oil is equivalent to 25000 hours of human labor, 12.5 years.Each American uses 25 barrels of oil a year, equivalent to 312 hard working laborers. If you include gas and coal, it jumps to 700 laborers, or Energy “slaves.” Early economists saw this energy as vast income to the society, to be treated as income to be spent to enrich and benefit mankind. In a real sense, fossil fuels have been THE source of our wealth both directly and indirectly. The countries that have used the most fossil fuels per capita have historically been the wealthiest at least in terms of GDP. It takes a vast amount of energy to power an industrial society and the countries with the greatest fossil endowments and the capacity to utilize fossil energy, Europe and the US, have up until recently been dominant in the world economy. AS recently as the 1970’s, the US with 4-5% of the world’s population was using 80% of the world’s oil. Even now that 4%  of the population is still consuming 25% of it’s oil. Economists are unanimous that it is energy that is the lifeblood of our industrial economy. It is so obvious as to almost not bear mentioning. Mainstream economists do not view Fossil fuels as capital or as EF Schumacher called them “natural capital.” If it were viewed as capital, it might be seen as something to be conserved and deployed when appropriate for the benefit of man, not as mere income to be spent. I have seen comments by economists that fossil resources are just one of many important natural resources necessary for a functioning industrial economy. Should some fossil energy resources get in short supply, a modern technologically driven economy will substitute other energy fuels to power the economy. I can recall visiting a nuclear reactor in Oak Ridge TN as a child and being told that nuclear power was the future of energy that  would be “too cheap to meter”. I also recall in the 1960’s when nuclear fusion research was in full flower.  Pollution free Fusion power plants would be coming on line in just a few decades just in time to replace our  aging first generation fission plants. Popular Science magazine covers were full of dazzling views of cities of the future and ideas as chimerical as an airplane in every garage. This unbounded faith in future energy technology probably partially explains the collective yawn of ridicule when M King Hubbert, a Shell geophysicist stood up and presented a paper the the annual meeting of the American Petroleum Institute in San Antonio Texas in 1956 and predicted that US oil production would peak in about 1970 and fall thereafter roughly approximating a bell curve distribution. When 1970 came and US oil production plateaued and fell as he predicted, little was made of his 1956 presentation. In 1956 production was still rising but here 56 years later is what the curve of US oil production looks like:

It is not a beautiful Gaussian bell distribution. It resembles the Grand Teton in my backyard with the secondary peak in the 1980’s representing the giant Alaskan North Slope field  That little nipple at the far right is frac oil from the Bakken, the Eagle Ford and other fields. It is a bigger nipple by now.   EF Schumacher along with other some non-mainstream economists has stated that Energy follows rules of its own that may bear little relation to conventional supply and demand and substitution concepts that so dominate classical economics.  I regard Fossil Energy as the sine qua non of our industrial economy, the bedrock source of wealth and that a shortage or depletion of these fuels, primarily oil, will crash the industrial economy. My opinion is a minority one shared by a few resource economists and a scattering of energy and resource bloggers. Labor and capital existed long before free fossil energy. Wealth was accumulated slowly. It took free concentrated fossil energy combined with labor and capital to drive civilization up the hockey stick of exponential growth.It is the consequences of that energy driven exponential growth that I would like to cover in a future post. For now I would like to summarize by saying that energy is the basis for and the root of our industrial wealth.