Thursday, March 8, 2012

Iran, Oil, and Economies

What follows is an analysis of real data. It is very, very hard to argue with measured numbers, and with historical facts. This explains why I believe what I believe, and say what I say, about the various topics of Iran (and the middle east in general), oil, and our western economic troubles in recent decades.

These things are all connected, and not in a nice way. Many of you will not like what I have to say about this. But, please, do think carefully about it, before you choose to continue believing all the propaganda we are constantly bombarded with (especially in election years).

Figure follows, as copied from Wed 3-7-12, to show an inflation-corrected fuel price history for US national average regular gasoline prices since the 1970's (the noted events are theirs):

Now, what follows is the same plot, as modified by GWJ Wed 3-7-12 to reflect more historical events during those same years:

Oops, error correction 3-15-12: Where it says "Iran invades Kuwait 1990" in this figure, it should read "Iraq invades Kuwait 1990".

There are some painfully-obvious correlations between fuel price spikes and the noted historical events, as indicated so plainly by the second figure. Here is my more detailed analysis of all those correlating features.

Re: 1973 Oil Embargo - Iran, still under the Shah, did not vote to hurt the west by an oil embargo. But, once OPEC voted, all its members, Iran included, went along, and made scads of money off it.

Re: Iran hostage crisis – Iranians deposed the Shah, invited Khomeini home, and invaded the US embassy and took hostages. We have been crossways with them ever since. Were the US embassy personnel intelligence operatives? Yes, most or all were. So what? Who has an embassy with personnel that are not some sort of spies? “Embassy spies” is irrelevant as an issue.

Re: “Carter inflation years” – these years of combined "economic stagnation" and severe inflation persisted well into Reagan’s second term. The better times came very shortly after fuel prices dropped, at almost exactly the same time as Reagan gave the Iranians the weapons they wanted, in the Iran-Contra scandal/deal.

Substantive conclusion: Reagan’s GOP economic policies did not lead to good times, low fuel prices did.

Second substantive conclusion: Democrat economic policies under Carter had little or nothing to do with stagflation, high fuel prices did.

Re: Iraq (error correction 3-15-12) invades Kuwait – One OPEC member invades another, but there was no monopoly cartel price hike (no one in the west to "punish" for it). The smaller, brief price spike measures the effects that war fears have upon fuel price speculators, and their relative impact upon fuel prices as a whole.

Re: 1st Gulf War US Invasion 1991 - this was caused by an OPEC member (Iraq) who misbehaved by invading another OPEC member (Kuwait) in 1990. The rest of OPEC actually wanted us to kick them out of Kuwait. So there was not any effect on fuel prices.

Re: US invades Afghanistan 2001 – Afghanistan is not an OPEC member. It has no oil reserves. That there was no effect on fuel prices is not really surprising. Nobody, not even OPEC, cared anything about Afghanistan. If you go back and look, the Soviet invasion of Afghanistan had no effect, either (1980-1989).

Re: US invades Iraq 2003 - the US invades looking for WMD’s that weren’t there. There is an immediate price spike-up as "punishment" to the western coalition for invading an OPEC member. There is a steady increase in price as long as we are there, right up to the Great Recession.

Re: “Great Recession” begins – 2 years above $3/gal sent us into the deepest recession/depression since the 1930’s. Evidently, the higher the spike, and the longer prices are high, the worse the recessionary effect.

Re: “trigger level” – seems to be about $2.50/gal gasoline, in March 2012 dollars. Again, the higher the price, and the longer it stays there, the worse the effect. Two bad events (’79 and ’03) show the very same thing.

Substantive conclusion: western economies, "designed" by the "dead hand of Adam Smith" to run on cheap fuel, do very, very poorly whenever fuel prices are high enough long enough.

Re: “free market” – if fuel prices were really governed by free market forces and not monopoly cartel whims, one would expect roughly factor-7.5 inflation applied to the 1958 price of regular gasoline (22-26 cents/gallon back then), for the $1.75-$2.00/gal price range shown. Soda pop and bread prices do indeed reflect this factor-7.5 inflation effect. Fuels do not.

Substantive conclusion: therefore, fuel prices are not governed by free market forces, although they do respond to them.

Substantive conclusion: fuel prices are quite evidently set mainly by monopoly cartel pricing during two periods during the last 4 decades. This graph indicates two very severe episodes of punitive pricing, which are quite evidently economic warfare aimed at the west.

Re: fixed max OPEC production ceiling – an approximation based on reported Saudi figures, justifiable since the Saudis dominate all OPEC production. They have reduced below, but never exceeded, their 2004 production rates.

Historical fact: one symptom of “peak oil” from any given field is the inability to increase production rates with the same methods, when heretofore, production increases were possible.

Historical fact: the 3 largest oil fields ever discovered anywhere on the planet are the 3 largest Saudi fields, whose 2004 production rates seem to be no longer increasable.

Well-Supported Fear: planetary “peak oil” began just about 8 years ago, with respect to about 2/3 of the world’s supply. This would constitute a change in the conditions underlying the oil market since 2004, from those conditions underlying it from 1970 to 2004. It might partly explain the steady ramp-up of fuel prices since 2002 (interrupted by the Great Recession) as world supply falling short of world demand for the very first time in history, since the first oil well was drilled in 1869.

Other Notes:

1. It is hard to argue with numbers and with recorded history. On the other hand, it is always possible that my inferences of causality are incorrect. Correlation is certain, causality is an interpretation. But I know how people behave. So, I do not think I am wrong. Not by a long shot.

2. Historically, it takes about 4 decades to replace one major industry with another in a market economy not driven by regulation or tax structures. We should have started replacing oil-based transportation fuels in 1973. We did not. We are in very deep trouble now, with the prospect of permanent economic depression due to chronic high fuel prices.

3. We are still crossways with Iran. They are the 3rd largest producer in OPEC. It sure would be nice if we were friends again. Hard to do when their government hates ours so. That their government is whacko-extremist-crazy by our standards is actually irrelevant, although it does explain a lot to me.

4. OPEC formed in 1963 specifically to be a price-fixing cartel. The US passed its peak oil production shortly after, about 1965 or 1970. After that, the influence of US oil production on world oil prices declined sharply, as did our production. Our imports soared. Today, 2/3 of world oil production is OPEC. They largely set world oil prices, therefore. If they start a rumor of war in the Mideast, world oil prices rise out of fear. Simple as that.

5. A few years after US production in the "lower 48" peaked, there was the introduction of Alaskan oil from Prudhoe Bay, via the Alaskan oil pipeline. This did not stave off US imports, being but a bump on the declining trace of US production over time. Alaskan production actually peaked in 1985, and has declined ever since. All discoveries since have been smaller still. This includes ANWR (actually just the east end of the Prudhoe Bay field), and the deepwater Gulf. Whatever there is off California, and whatever there might (or might not) be off the Atlantic coast, is smaller still. Whatever "frackable shale oil" there is in the Williston Basin is even smaller still, although it does currently support an oil boom in Montana and North Dakota.

6. Williston Basin “frackable shale oil” is not really shale oil. Shale still cannot be “fracked” for oil, only for gas. Oil is not mobile enough at those porosities and connectivities. There is a dolomite layer sandwiched within the Williston Basin shale that also contains a light crude, and that layer is “frackable”. But, it’s a smaller fraction of the Williston Basin “resource”. See also “Bakken”.

7. When US politicians promise cheap fuel at $2.50/gallon by opening up our remaining reserves, they are lying, most egregiously. We could not significantly affect world oil prices, no matter how much we produced, because those undeveloped reserves we do have, are simply too small to ever significantly affect world oil supply.

8. The only possible way to produce “cheap oil” would be to opt completely out of the world oil market (we consume what we produce, without ever putting it on the market). The only way to do that would be to nationalize the oil industry, which is political anathema to those who claim (for political campaign purposes) we could do this. And, there would never be enough oil to satisfy our domestic demand. So, why bother? Pump the oil, yes! Depend on it to “save” us? No way!

9. Substantive conclusion: believe no politician or political party when they say they know how to deal with (or even significantly affect) high oil prices, or when they claim their ideologies and party agendas have any effect on the economy, beneficial or otherwise.

GWJ 3-7-12

Update 1-3-15:

The recent explosion of US “fracking” technology (hydraulic fracturing plus horizontal-turn drilling) has modified the picture of oil prices versus recessions.  Unexpectedly,  the US has become a leading producer of crude oils for the world market.  Plus,  there has been an associated massive production increase and price drop in natural gas.

OPEC has chosen to take the income “hit” and not cut back their production in response.  Their reasoning is twofold:  (1) fear of loss of market share,  and (2) hope that low oil prices will curtail US “fracking” recoveries.  We will see how that plays-out.

Oil prices are now such (at around $55/barrel) that US regular gasoline prices are nearing $2.00/gal for the first time in a very long time.  This is very close to the price one would expect for a truly competitive commodity,  based on 1958 gasoline prices in the US,  and the inflation factor since then. 

It is no coincidence that the exceedingly-weak US “Great Recession” recovery has suddenly picked up steam.  The timing of the acceleration in our economic recovery versus the precipitous drop in oil prices is quite damning.  There can be no doubt that higher-than-competitive-commodity oil prices damage economies.  Oil prices are a superposition of the competitive commodity price,  overlain by an erratic increase from speculation,  and further overlain quite often by punitive price levels when OPEC is politically unhappy with the west.  That’s been the history. 

This economic improvement we are experiencing will persist as long as oil,  gas,  and fuel prices remain low.  (Government policies have almost nothing to do with this,  from either party.)  How long that improvement continues depends in part upon US “fracking” and in part upon OPEC.  Continued US “fracking” in the short term may depend upon adequate prices.  In the long term,  we need some solutions to some rather intractable problems to continue our big-time “fracking” activities. 

The long-term problems with “fracking” have to do with (1) contamination of groundwater with combustible natural gas,  (2) induced earthquake activity,  (3) lack of suitable freshwater supply to support the demand for “fracking”,  and (4) safety problems with the transport of the volatile crude that “fracking” inherently produces. 

Groundwater Contamination

Groundwater contamination is geology-dependent.  In Texas,  the rock layers lie relatively flat,  and are relatively undistorted and unfractured.  This is because the rocks are largely old sea bottom that was never subjected to mountain-building.  We Texans haven’t seen any significant contamination of ground water by methane freed from shale.  The exceptions trace to improperly-built wells whose casings leak.

This isn’t true in the shales being tapped in the Appalachians,  or in the shales being tapped in the eastern Rockies.  There the freed gas has multiple paths to reach the surface besides the well,  no matter how well-built it might have been.  Those paths are the vast multitudes of fractures in the highly-contorted rocks that subject to mountain-building in eons past.  That mountain-building may have ceased long ago,  but those cracks last forever. 

This is why there are persistent reports of kitchen water taps bursting into flames or exploding,  from those very same regions of the country.   It’s very unwise to “frack” for gas in that kind of geology.

Induced Earthquake Activity

This does not seem to trace to the original “fracking” activity.  Instead it traces rather reliably to massive injections of “fracking” wastewater down disposal wells.  Wherever the injection quantities are large in a given well,  the frequent earthquakes cluster in that same region.  Most are pretty weak,  under Richter magnitude 3,  some have approached magnitude 4. 

There is nothing in our experience to suggest that magnitude 4 is the maximum we will see.  No one can rule out large quakes.   The risk is with us as long as there are massive amounts of “fracking” wastewater to dispose of,  in these wells.  As long as we never re-use “frack” water,  we will have this massive disposal problem,  and it will induce earthquakes. 

Lack of Freshwater Supply to Support “Fracking”

It takes immense amounts of fresh water to “frack” a single well.  None of this is ever re-used,  nor it is technologically-possible to decontaminate water used in that way.  The additives vary from company to company,  but all use either sand or glass beads,  and usually a little diesel fuel.  Used “frack” water comes back at near 10 times the salinity of sea water,  and is contaminated by heavy metals,  and by radioactive minerals,  in addition to the additives.  Only the sand or glass beads get left behind:  they hold the newly-fractured cracks in the rocks open,  so that natural gas and volatile crudes can percolate out. 

The problem is lack of enough freshwater supplies.  In most areas of interest,  there is not enough fresh water available to support both people and “fracking”,  especially with the drought in recent years.  This assessment completely excludes the demand increases due to population growth.  That’s even worse.

This problem will persist as long as fresh water is used for “fracking”,  and will be much,  much worse as long as “frack” water is not reused.  The solution is to start with sea water,  not fresh water,  and then to re-use it.  This will require some R&D to develop a new additive package that works in salty water to carry sand or glass beads,  even in brines 10 times more salty than sea water. 

Nobody wants to pay for that R&D. 

Transport Safety with Volatile “Frack” Crudes

What “fracking” frees best from shales is natural gas,  which is inherently very mobile.  Some shales (by no means all of them) contain condensed-phase hydrocarbons volatile enough to percolate out after hydraulic fracturing,  albeit more slowly than natural gas.  Typically,  these resemble a light,  runny winter diesel fuel,  or even a kerosene,  in physical properties.  More commonly,  shale contains very immobile condensed hydrocarbons resembling tar.  These cannot be recovered by “fracking” at all. 

The shales in south Texas,  and some of the shales and adjacent dolomites in the Wyoming region actually do yield light,  volatile crudes.  The problem is what to transport them in.  There are not enough pipelines to do that job.  Pipelines are safer than rail transport,  all the spills and fires notwithstanding. 

The problem is that we are transporting these relatively-volatile materials in rail tank cars intended for normal (heavy) crude oils,  specifically DOT 111 tank cars.  Normal crudes are relatively-nonvolatile and rather hard to ignite in accidents.  DOT 111 cars puncture or leak frequently in derail accidents,  but this isn’t that serious a problem as long as the contents are non-volatile.  These shale-“frack” light crude materials resemble nothing so much as No. 1 winter diesel,  which is illegal to ship in DOT 111 cars,  precisely since it is too volatile. 

The problem is that no one wants to pay for expanding the fleet of tougher-rated tank cars.  So,  many outfits routinely mis-classify “frack” light crudes as non-volatile crudes,  in order to “legally” use the abundant but inadequate DOT-111 cars.  We’ve already seen the result of this kind of bottom line-only thinking,  in a series of rather serious rail fire-and-explosion disasters,  the most deadly (so far) in Lac Megantic,  Quebec. 

Volatile shale-“fracked” crudes simply should not be shipped in vulnerable DOT 111 cars,  period.  It is demonstrably too dangerous. 


“Fracking” shales for natural gas and light crudes has had a very beneficial effect on the US economy and its export-import picture.  We should continue this activity as a reliable bridge to things in the near future that are even better. 

But,  we must address the four problem areas I just outlined.  And I also just told you what the solutions are.  The problem is,  as always,  who pays.   What is the value of a human life?  What is the value of a livable environment?  It’s not an either-or decision,  it’s striking the appropriate balance!

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