Keep an eye on the Bakken

[Cardboard]

While the media keeps touting that new U.S. oil production is going to create a large glut and is a given, keep in mind that this is all production subject to very large initial decline rates and you never fully know what is below ground level. This is not like the oil sands where production rate is dictated by infrastructure and can stay flat for 50 years unless processing capacity is increased. You need a lot of new wells to see an on-going rate close to what is being produced now. We could see in short order a peak followed by a bust in drilling if new areas are not found.

 

http://www.kxnet.com/story/20480884/chesapeake-drills-unsuccessful-wells-in-southwest-nd

 

http://srsroccoreport.com/the-coming-bust-of-the-great-bakken-oil-field/the-coming-bust-of-the-great-bakken-oil-field/

 

This could mean trouble for producers, drillers, industrial firms and eventually U.S. employment. Moreover, it could mean higher prices for oil down the road.

 

Cardboard

 

 

[value-is-what-you-get]

While the media keeps touting that new U.S. oil production is going to create a large glut and is a given, keep in mind that this is all production subject to very large initial decline rates and you never fully know what is below ground level. This is not like the oil sands where production rate is dictated by infrastructure and can stay flat for 50 years unless processing capacity is increased. You need a lot of new wells to see an on-going rate close to what is being produced now. We could see in short order a peak followed by a bust in drilling if new areas are not found.

 

http://www.kxnet.com/story/20480884/chesapeake-drills-unsuccessful-wells-in-southwest-nd

 

http://srsroccoreport.com/the-coming-bust-of-the-great-bakken-oil-field/the-coming-bust-of-the-great-bakken-oil-field/

 

This could mean trouble for producers, drillers, industrial firms and eventually U.S. employment. Moreover, it could mean higher prices for oil down the road.

 

Cardboard

 

Munger on oil "it's the height of stupidity to drill our own oil.  We should use everyone else's first, then start drilling."  Munger on oil prices "If you think oil prices are high, you ain't seen nothing yet"

[Palantir]

Yeah, some pretty dumb statements from an otherwise good investor.

[Guest 50centdollars]

Yeah, some pretty dumb statements from an otherwise good investor.

 

Why would you say its dumb?

[bz1516]

While the media keeps touting that new U.S. oil production is going to create a large glut and is a given, keep in mind that this is all production subject to very large initial decline rates and you never fully know what is below ground level. This is not like the oil sands where production rate is dictated by infrastructure and can stay flat for 50 years unless processing capacity is increased. You need a lot of new wells to see an on-going rate close to what is being produced now. We could see in short order a peak followed by a bust in drilling if new areas are not found.

 

http://www.kxnet.com/story/20480884/chesapeake-drills-unsuccessful-wells-in-southwest-nd

 

http://srsroccoreport.com/the-coming-bust-of-the-great-bakken-oil-field/the-coming-bust-of-the-great-bakken-oil-field/

 

This could mean trouble for producers, drillers, industrial firms and eventually U.S. employment. Moreover, it could mean higher prices for oil down the road.

 

Cardboard

 

Munger on oil "it's the height of stupidity to drill our own oil.  We should use everyone else's first, then start drilling."  Munger on oil prices "If you think oil prices are high, you ain't seen nothing yet"

 

Not sure why its a negative to define the southern bound of the Bakken?  Every oil field has to end somewhere! 

 

Because its very difficult to know the precise age and decline rates of all the new wells and the precise decline rates of all the wells its very difficult to make statements about the overall decline rate of the Bakken.  Once a well gets to about 2 years old its getting close to the long term average it can produce at for many years so the decline rate is minimal from there on.  What I am suggesting is the "decline rate" we see is a function of new and old wells, not the decline rate of the mature wells.  An average decline rate for the play has no meaning analytically in the context of rapid initial declines.

 

The test of the ultimate size of the play is how many more drilling locations there are left.  I think there are a lot.    Neither of those articles go into enough depth to make a statement. 

[Palantir]

Yeah, some pretty dumb statements from an otherwise good investor.

 

Why would you say its dumb?

 

It's not obvious at all that it's a bad idea to drill your own oil, and the fact that Munger sees no opposing argument as worthwhile reeks of stupidity and arrogance. I'd say it's a one-off but he has a long habit of making dumb statements, "Civilized people don't own gold". Yeah ok Charlie.

[StubbleJumper]

Yeah, some pretty dumb statements from an otherwise good investor.

 

Why would you say its dumb?

 

It's not obvious at all that it's a bad idea to drill your own oil, and the fact that Munger sees no opposing argument as worthwhile reeks of stupidity and arrogance. I'd say it's a one-off but he has a long habit of making dumb statements, "Civilized people don't own gold". Yeah ok Charlie.

 

 

I agree completely.  On rare occasions, Munger fails to take a multidisciplinary analytical approach before coming up with a dogmatic one-liner.  A rudimentary review of history would yield the observation that the western world has had several energy revolutions, with wood, peat, coal, whale oil and petroleum all being dominant for some purpose at some stage of our development.

 

A version of Munger from the 14th century might have said, "It's the height of stupidity to cut our own wood", while in the 16th century Munger II might have said, "It's the height of stupidity to dig our own peat", in the 18th century Munger III would have said "It's the height of stupidity to harpoon our own whales", and so on.

 

So, we are currently dealing with Munger V saying that we would be better to not fritter away our own petroleum.  Munger VI will probably say that we shouldn't export natural gas (LNG).  Munger VII will say that we really shouldn't dig our our own uranium.  And then Munger VIII will eventually realise the dream of renewables or perhaps fusion.

 

Now, none of the future sources of energy are obvious from the current perspective with existing technology.  However, a cursory review of history would tell us that there will almost certainly be something else before we fully exhaust our reserves of petroleum.  Dogmatically declaring that we're bonkers for using the most best source of energy economically available today seems like a bizarre thing for a man of Munger's learning.

 

 

SJ

[jay21]

I think a few of your examples are a little off base.  I think Munger would recognize you can plant more trees.  He's worried because you can't plant more oil.

 

But, I probably should just keep my mouth shut wrt to this because I am not knowledgeable.  If anyone has some links readily available with regards to Munger's views on energy I'd love to read them.  I'm sure he has a much more nuanced view and has done his work.  My instincts have me leaning against him so I would like to hear a deeper explanation.

[merkhet]

 

I agree completely.  On rare occasions, Munger fails to take a multidisciplinary analytical approach before coming up with a dogmatic one-liner.  A rudimentary review of history would yield the observation that the western world has had several energy revolutions, with wood, peat, coal, whale oil and petroleum all being dominant for some purpose at some stage of our development.

 

A version of Munger from the 14th century might have said, "It's the height of stupidity to cut our own wood", while in the 16th century Munger II might have said, "It's the height of stupidity to dig our own peat", in the 18th century Munger III would have said "It's the height of stupidity to harpoon our own whales", and so on.

 

So, we are currently dealing with Munger V saying that we would be better to not fritter away our own petroleum.  Munger VI will probably say that we shouldn't export natural gas (LNG).  Munger VII will say that we really shouldn't dig our our own uranium.  And then Munger VIII will eventually realise the dream of renewables or perhaps fusion.

 

Now, none of the future sources of energy are obvious from the current perspective with existing technology.  However, a cursory review of history would tell us that there will almost certainly be something else before we fully exhaust our reserves of petroleum.  Dogmatically declaring that we're bonkers for using the most best source of energy economically available today seems like a bizarre thing for a man of Munger's learning.

 

 

SJ

 

The very definition of cursory, in fact. There is some survivorship bias in your statement.

[StubbleJumper]

 

I agree completely.  On rare occasions, Munger fails to take a multidisciplinary analytical approach before coming up with a dogmatic one-liner.  A rudimentary review of history would yield the observation that the western world has had several energy revolutions, with wood, peat, coal, whale oil and petroleum all being dominant for some purpose at some stage of our development.

 

A version of Munger from the 14th century might have said, "It's the height of stupidity to cut our own wood", while in the 16th century Munger II might have said, "It's the height of stupidity to dig our own peat", in the 18th century Munger III would have said "It's the height of stupidity to harpoon our own whales", and so on.

 

So, we are currently dealing with Munger V saying that we would be better to not fritter away our own petroleum.  Munger VI will probably say that we shouldn't export natural gas (LNG).  Munger VII will say that we really shouldn't dig our our own uranium.  And then Munger VIII will eventually realise the dream of renewables or perhaps fusion.

 

Now, none of the future sources of energy are obvious from the current perspective with existing technology.  However, a cursory review of history would tell us that there will almost certainly be something else before we fully exhaust our reserves of petroleum.  Dogmatically declaring that we're bonkers for using the most best source of energy economically available today seems like a bizarre thing for a man of Munger's learning.

 

 

SJ

 

The very definition of cursory, in fact. There is some survivorship bias in your statement.

 

 

Yes there is a great deal of survivorship bias in my statement.  It's a pure observation of human ingenuity and economics driving innovation.]

 

Would you like to do the same process with the revolution of food sources?  It's really the same thing.  We develop/discover superior products over time and the new superior products displace the old.  It is baffling that people have such a short term perspective that they think the process has ended and that our current dominant energy sources and our current dominant food species are somehow the end of the line.

 

 

SJ

[Palantir]

I agree with SJ. You put it way more eloquently than I can. Oil is not a strategic asset in the same way that some rare earth metal is, it's a valuable commodity that everybody on the planet needs regardless of nationality. If the rest of the world dries up, and US is the only one that has oil, it will not be a good situation even for the US. At that point, if you're going to sell oil to the rest of the world, how exactly will Americans benefit again? Don't Americans also benefit from low oil prices? Don't Americans also trade with other countries?

 

Furthermore, tomorrow we may develop new sources of energy, say solar, what then?

 

 

 

[merkhet]

 

Would you like to do the same process with the revolution of food sources?  It's really the same thing.  We develop/discover superior products over time and the new superior products displace the old.  It is baffling that people have such a short term perspective that they think the process has ended and that our current dominant energy sources and our current dominant food species are somehow the end of the line.

 

SJ

 

It is equally baffling the certainty with which you present our ability to invent our way out of trouble.  Think about it from the point of view of a person taking on a lot of future liabilities from a loan shark.  On the one hand, it may be likely that one's income grows to make sure that those future liabilities are not a problem.  After all, you still have your knees.  On the other hand, this does not mean that prudence and conservation of existing assets for the payment of those future liabilities all of a sudden becomes silly.

 

 

I agree with SJ. You put it way more eloquently than I can. Oil is not a strategic asset in the same way that some rare earth metal is, it's a valuable commodity that everybody on the planet needs regardless of nationality. If the rest of the world dries up, and US is the only one that has oil, it will not be a good situation even for the US. At that point, if you're going to sell oil to the rest of the world, how exactly will Americans benefit again? Don't Americans also benefit from low oil prices? Don't Americans also trade with other countries?

 

Furthermore, tomorrow we may develop new sources of energy, say solar, what then?

 

 

When you are a monopoly owner of assets, then... well, good things happen to you via value extraction from the other people.

 

I don't remember which thread had the quote from Howard Marks saying that we need to think in terms of probabilities.

 

There is some probability X that we develop sustainable new energy sources and some probability Y=(1-X) that we do not.  Thus, a probability tree is formed. 

 

In the X world, we must remember that oil is also used in such things as plastics, which are fairly important to industry so even if we suddenly removed the 2/3 dependency for transport, it's not as if the oil suddenly becomes useless -- much in the same way that a put option expiring in January 2014 is not useless to its holder for the duration purely because it has lost value.

 

In the Y world, things are obvious.

 

FWIW, I think you're both right that there's a likelihood that we find something else before oil runs out.  (Notably, I do not think this because of past history, but that distinction is negligible.)

 

Let me flip this and invert it.  (A Munger favorite.)  Would you both be in favor of using every last drop of our oil over the next 12 months?  I suspect the answer is no.

[Palantir]

 

- How do you know that oil will be the most important commodity? I know you addressed this, but I think this is crucial to consider.

 

- Who is "you"? :) More specifically, is the US really the owner of the oil that sits here? Does it not belong to the owners of the land/mineral rights?

 

- When you are a monopoly owner of oil, what will happen to the price of oil? How will that benefit Americans?

 

- What happens when prices of one commodity rise? You don't believe there will be substitution?

 

- How much income will Americans give up by not drilling oil? How will that compare against the benefits from keeping it all?

 

- I disagree with you on every last drop. I have no problem with the US drilling it all, I just do not see it as strategic, but I'm flexible on this point. :)

 

 

The crux of the argument - I think you agree with the fact that there are many arguments in favor of exporting, do you see why the comment of "the height of stupidity" sounds so ridiculous?

 

[merkhet]

I have a feeling that this will be a long discussion purely because I think you have strongly held views, which tends to lead to long discussions.  Disclaimer that I will be drunk in approximately 2 hours because there is a NCAA Championship game tonight, so if I come back on here to respond to your response, I may be nonsensical.  Though you may think I'm nonsensical now. :P

 

 

- How do you know that oil will be the most important commodity? I know you addressed this, but I think this is crucial to consider.

 

 

I don't think I ever said oil would be the MOST important commodity. Explain to me why this is crucial to consider.

 

 

- Who is "you"? :) More specifically, is the US really the owner of the oil that sits here? Does it not belong to the owners of the land/mineral rights?

 

 

There are some strategic reserves in combination with some private reserves.  Query to you.  How likely do you think it will be for Lukoil or CNOOC to drill on American soil?  (Think CNOOC & Unocal.)

 

 

- When you are a monopoly owner of oil, what will happen to the price of oil? How will that benefit Americans?

 

 

Well, Americans in that case would be the only ones with a functioning transportation system, so... it would benefit them greatly.  Think about it in terms of food.  Substitute oil for food.

 

 

- What happens when prices of one commodity rise? You don't believe there will be substitution?

 

 

Fill your car up with natural gas lately?  If I had all the food, would you suddenly substitute rocks for protein?

 

 

- How much income will Americans give up by not drilling oil? How will that compare against the benefits from keeping it all?

 

 

Again, you're not thinking probabilistically.  In one future, it will benefit Americans greatly.  In another future, maybe not so much.

 

 

- I disagree with you on every last drop. I have no problem with the US drilling it all, I just do not see it as strategic, but I'm flexible on this point. :)

 

The crux of the argument - I think you agree with the fact that there are many arguments in favor of exporting, do you see why the comment of "the height of stupidity" sounds so ridiculous?

 

I think whether you think it's the height of stupidity depends on a number of factors:

 

(1) The speed at which each individual economy can develop their substitutes

(2) Whether you can still extract a pound of flesh from emerging markets long after you have substitutes

(3) How important you think the oil is to our country's survival in short-, medium- and long-term

(4) etc.

[Palantir]

I have a feeling that this will be a long discussion purely because I think you have strongly held views, which tends to lead to long discussions.  Disclaimer that I will be drunk in approximately 2 hours because there is a NCAA Championship game tonight, so if I come back on here to respond to your response, I may be nonsensical.  Though you may think I'm nonsensical now. :P

 

 

In that case, I withdraw. :D

 

I have incurred the wrath of the Apples already, I can't wage two fronts.

 

 

 

[oldye]

Food for thought: http://www.afdc.energy.gov/vehicles/natural_gas.html

 

Natural gas powers about 112,000 vehicles in the United States and roughly 14.8 million vehicles worldwide.

 

Currently growing at about 10% per year, how long before natural gas makes up roughly 1% of all vehicles on the road in the U.S?

 

Back to the topic at hand- this is paraphrasing of course:

Charlie has stated several times that he thinks using up all of our easy to find hydrocarbon resources for transportation is short sighted and stupid. 

 

In that last video I saw he said that he thinks scientists might come up with a solution but it is no way to bet...

 

 

 

 

 

 

[StubbleJumper]

 

Would you like to do the same process with the revolution of food sources?  It's really the same thing.  We develop/discover superior products over time and the new superior products displace the old.  It is baffling that people have such a short term perspective that they think the process has ended and that our current dominant energy sources and our current dominant food species are somehow the end of the line.

 

SJ

 

It is equally baffling the certainty with which you present our ability to invent our way out of trouble.  Think about it from the point of view of a person taking on a lot of future liabilities from a loan shark.  On the one hand, it may be likely that one's income grows to make sure that those future liabilities are not a problem.  After all, you still have your knees.  On the other hand, this does not mean that prudence and conservation of existing assets for the payment of those future liabilities all of a sudden becomes silly.

 

 

History is on my side.  ;D  But more seriously, the US has like what, 10 years of proven reserves at current rates of production?  So that would be what, like 100 years of actual production if you really forced the issue and extracted every possible drop out of every domestic reservoir and if you discovered every reservoir on US soil and in US waters that is not yet discovered?  So in the end, even if one were to seriously contemplate the possibility that we might not "not invent our way out of trouble" by not immediately extracting domestic petroleum from the US what we're really talking about is the difference of a few decades before supplies are exhausted.  So at best we'd be postponing the energy cliff, which really doesn't do that much for us.

 

In the end, a transition to some other energy source must occur...and a couple of decades more or less doesn't really make much of a difference on that.  If you subscribe to the view that petroleum reserves will become irrevocably depleted, then you must also subscribe to the view that prices will necessarily increase.  And it is from the scarcity-driven increase in petroleum prices that the next dominant source of energy will be born as people seek out rents from innovation. 

 

Personally, I'd say the earth probably has another 200 or so years of petroleum, if we elect to use it and if we are prepared to pay the cost of extracting it.  But I'd guess we'll have moved on to our next dominant energy source long before the 200 years elapses.  And likely before 100 years elapses.

 

Again, history is on my side.  ;D

 

SJ

[merkhet]

Again, history is on my side.  ;D

 

SJ

 

Said the turkey to the farmer. :P

 

I actually agree with most of what you said, but let's not forget that technology adoption does not filter to everyone equally. Again, you are likely to be able to extract significant value from emerging markets that have to depend on older technology.

[yadayada]

If we have a break through in battery power and solar, which both dont seem unfeasable, it would largely replace natural gas, coal and oil.

 

I think another argument is that you risk not making money on those oil assets. What if there is a break through in 40 years? And oil drops like a rock. Technology moves crazy fast, especially if we have a few billion people in the east now also getting shots at higher education. millions of people thinking about solutions, seems likely enough break throughs will start to happen soon. Seems v likely we will have another Einstein within the next 100 years, with so many people having acces to information now. And remember, scienctific discoveries is also a function of chance. Alot of breakthroughs were discovered by accident.

[Palantir]

History is on my side.  ;D  But more seriously, the US has like what, 10 years of proven reserves at current rates of production?  So that would be what, like 100 years of actual production if you really forced the issue and extracted every possible drop out of every domestic reservoir and if you discovered every reservoir on US soil and in US waters that is not yet discovered?  So in the end, even if one were to seriously contemplate the possibility that we might not "not invent our way out of trouble" by not immediately extracting domestic petroleum from the US what we're really talking about is the difference of a few decades before supplies are exhausted.  So at best we'd be postponing the energy cliff, which really doesn't do that much for us.

 

It is known.

[no_free_lunch]

I think another argument is that you risk not making money on those oil assets. What if there is a break through in 40 years? And oil drops like a rock.

 

+1

[no_free_lunch]

It seems like fracking puts a bit of a floor on oil prices. I think there is still a lot of resources out there but it will just be more and more expensive to get at it.  So production may or may not decline in aggregated based purely on the price level.  Higher prices just open a valve to increase drilling, to the point where it is economical again. 

 

So it seems that if declining output from non traditional oil holds prices up and ultimately increases them, then something like the tar sands are poised perfectly with more or less fixed costs.  Maybe that was the original point of the post, I don't know, but that is the silver lining.

 

[moustachio]

While the media keeps touting that new U.S. oil production is going to create a large glut and is a given, keep in mind that this is all production subject to very large initial decline rates and you never fully know what is below ground level. This is not like the oil sands where production rate is dictated by infrastructure and can stay flat for 50 years unless processing capacity is increased. You need a lot of new wells to see an on-going rate close to what is being produced now. We could see in short order a peak followed by a bust in drilling if new areas are not found.

 

http://www.kxnet.com/story/20480884/chesapeake-drills-unsuccessful-wells-in-southwest-nd

 

http://srsroccoreport.com/the-coming-bust-of-the-great-bakken-oil-field/the-coming-bust-of-the-great-bakken-oil-field/

 

This could mean trouble for producers, drillers, industrial firms and eventually U.S. employment. Moreover, it could mean higher prices for oil down the road.

 

Cardboard

 

Some of the Bakken producers either already are or will soon start funding capex with their operational cash flow. It won't be long before we see exactly how much production can be grown from sustainable cash flows. All oil is eventually depleted, and the bakken wells have high decline rates... but there are a lot of companies with a lot of acreage. Plenty of companies are projecting big increases in production for next year. That second article seems like it is taking a doom and gloom slant on something most people involved with the Bakken are fully aware of, including the people projecting production rates into the future. IIRC, most of the estimates have undershot the actual oil that has gotten pulled out of the ground...