World Oil Shock Scenario and the Fate of Wisconsin: Pt. 1

PREMISES
The premises, certain assumptions, which are set forth beforehand as an introduction or a postulate in this post are in many cases the conclusions reached by various researchers and writers after lifetimes of work in the fields of energy, fossil-fuel energy in particular, and its effect on the economy and the environment in which economies operate. For example, from Art Berman of Labyrinth Consultants, who serves up advice to the energy industries, we have the notion that “Money is merely a call on work, energy. Energy is the economy.” His critique of the gushing enthusiasm for the “shale revolution” (what we’ll call the “fracking frenzy” in this post) shown by business writers and governmental writers housed at the Energy Information Agency should be familiar to everyone who has delved into the so-called “U.S. Energy Independence” narrative of late.

PART II is HERE

Some of these premises are that growth in energy consumption, in particular petroleum and natural gas consumption, is highly correlated with growth in GDP. Throughout the post we’ll use the phrase “Gross Destructive Product or GDP” as a value-judgment on the impacts of GDP upon the global, national, and 50-states environments in the USA: GDP growth is highly destructive. Another premise is that growth in GDP now depends highly upon cheap energy sources, and that when energy prices rise sharply then GDP will tend to fall. This is because the wages of “non-elite workers” are inadequate to support consumer spending if energy prices spike upwards.

A follow-on premise is that, in the absence of the cheap petroleum supply of the prior half-century, (approx. 1955-2005) the central bankers turned to debt as the main driver of GDP growth, which has resulted in a current level of debt which is not sustainable under any governmental policy set, and hence, is a loaded risk factor for a deflationary, debt-default scenario. A premise is that the 2008 housing bubble burst / banking and credit crisis was by no means a “one-off” situation but should be seen as the “model case” for what comes next in the U.S. And its states economies, as well as the entire global economy, China not excepted.

OilProd-GDPincrease
Graph source: Oil Supply Limits and the Continuing Financial Crisis, By Gail Tverberg. Published in Energy Volume 37, Issue 1, January 2012, Pages 27-34.

How is U.S. oil consumption in million barrels a day impacted by a drop in Gross Destructive Product (GDP) growth? The 2008-2009 “crash” was a mere -2.5% GDP growth decline, but it dropped U.S. oil consumption by nearly 10% over that crash period. Consumption was heavily leveraged to the GDP growth rate apparently.USoilConsumpt2007-2018

The “mere” -2.5% growth rate of GDP was heavily leveraged into a loss of 8.8 million United States jobs in the Great Recession, however. That could explain the drop in oil consumption, as a lot of workers became less-consumers. Oil consumption was highly leveraged to job destruction, which led to “demand destruction” for petroleum products.

Now, the next question is, when oil consumption is forced to decline because of geophysical limits (depletion of resource), rather than job losses, how will THAT leverage into decline in GDP growth and in turn, job losses? In other words, a reversal of leveraging?

Dennis Coyne has perhaps the most comprehensive data-analytics set on what he’s calling the “World Oil Shock Model Scenarios in a post on Peakoilbarrel.com, published on 9/27/2019. We’re re-printing parts of this to show the level of detail in this.

EIA International Energy Outlook 2019 and Oil Shock Model Scenarios

by Dennis Coyne Posted on 09/27/2019

The EIA recently released its International Energy Outlook and it is quite optimistic.  In the chart below I compare their estimate for World Crude plus Condensate (C+C) output with an oil shock model with a URR of about 3100 Gb.  (Gb is gigabarrels of oil, billions of barrels –Ed.)

WorldOilShockGraph1top

The IEO reference scenario shown above (blue line) for World C+C has a trend line with a slope of 735 kb/d from 2017 to 2050, slightly less than the 1982 to 2018 slope for World C+C output’s annual increase of about 800 kb/d.  The difference between the IEO C+C output forecast and my more realistic (and perhaps optimistic) shock model estimate is 46 Mb/d in 2050.

The shock model focuses on conventional C+C output which excludes unconventional oil which I define as the combination of extra heavy oil (API Gravity <10) and tight oil.  The economically recoverable resource (ERR) from unconventional oil is 285 Gb in the scenario presented below.

The extra heavy (XH) and tight oil are modelled separately from conventional C+C.  The tight (LTO) and XH oil are both read on the left vertical axis and the unconventional oil (sum of LTO and XH) from the right vertical axis.  In each of the shock model scenarios presented below the unconventional C+C model output is added to the conventional shock model scenario (three separate cases). I focus on conventional C+C because the bulk of World C+C output consists of conventional C+C about 88% of World C+C in 2018 consisted of conventional C+C.

WorldOilShock-Tight

The extra heavy (XH) and tight oil are modelled separately from conventional C+C.  The tight (LTO) and XH oil are both read on the left vertical axis and the unconventional oil (sum of LTO and XH) from the right vertical axis.  In each of the shock model scenarios presented below the unconventional C+C model output is added to the conventional shock model scenario (three separate cases). I focus on conventional C+C because the bulk of World C+C output consists of conventional C+C about 88% of World C+C in 2018 consisted of conventional C+C. 

[Ed. Note: We’ll stop here and direct you to the rest of Dennis Coyne’s article]. [It is important to note that the “Tight Oil” he is referencing in the above chart is the oil from the Fracking Frenzy oil fields. These are the oil fields supplied with frac-sand from Wisconsin. That is what makes the above chart noteworthy for our discussion.]

The final chart for this discussion is Coyne’s primary reference chart, based on the “constant extraction” model. From the chart just above, the solid red line shows what we’re calling the “Fracking Bust,” beginning around 2025-2026, which is the end of the boom-and-bust cycle we’re calling the “Fracking Frenzy.” The chart below shows a world oil shock beginning around 2028-2030. The impact of both of these shocks, upon a state such as Wisconsin, will be truly devastating.

 

WorldOilShockModel3000GB

[See the whole in its original form here.]

Let’s take a look at energy consumption in Wisconsin. The Energy Information Agency makes this information available,
at their website, here

WiscEnergyConsumpt2017eia
Total Expenditure ranking is about in line with population percentage (Wisconsin ranked 20th in population in a recent Census estimate).
Per Capita ranking is below state size rank of #20.

by End-Use Sector, Wisconsin energy usage (all energy sources, 2017)
WIpetroleumByEndUse2017

Wisc-TotalPetroConsComplete2017If we look at just the petroleum consumption in Wisconsin, seen here above on a chart with other “W” states, we find that the state consumed annually close to 104 million barrels of petroleum, which is 1.42% of the national annual total of 7.28 billion barrels for 2017, which was the most recent date
EIA posted on their website chart.

So, if we think the Energy Information Agency (EIA) is correct in their highly optimistic projection of World Oil scenarios, Wisconsin will have no problem keeping our economy moving, as a steady supply of the petroleum that moves the economy should be available.

It is only if we take seriously the rapid oil-shock scenario described by Coyne in his World Oil Shock Scenarios, that Wisconsin will run into petro-problems. When we take in consideration that, of the EIA’s 82 million daily barrels of oil production shown in the green graph line in Dennis’s report, close to 8 million of that, nearly 10% per day is now coming from U.S. “Tight Oil” which is the fracked shale oil, then we have a problem—if Dennis’s model proves out in the years 2027+2028.

 The likelihood of the fracking “boom” turning to a fracking “bust” with rapidly declining production of the “Tight Oil” is a very real scenario being discussed by sober minds in the industry. It’s really not the alarmists who are presenting this scenario, primarily because it requires some grounding in the geophysics, or petro-geology, of the “Tight Oil” locations on which everyone from the Energy Information Agency to the Oval Office of the White House depends for their narrative case of “America’s Energy Indepencence.”  Let’s explore further…

Art Berman, who we introduced early in this piece, has a somewhat sarcastic presentation out in the past six months under the title “Tight Oil and The Willing Suspension of Disbelief” presented at College of the Coast & Environment, Louisiana State University November 22, 2019.

As usual, his presentations are laden with charts and graphs for the visual thinkers among us. The one graph that directly supports Dennis Coyne’s red-line graph shown above as part of the “World Oil Shock Scenarios” looks like this, and this has a major bearing on Wisconsin’s future for a couple reasons which we will delve into.

ArtBerman-Nov22-DumbassCaseSlide
If the dumbass case were to hold up in future, this would mean about a 4% annual decrease in United States petroleum production, which would certainly be “leveraged” as we discussed at the beginning of the post–to national GDP growth, and to job losses on a fairly major scale. That this would have major impact on Wisconsin, where we still think of our economy as a “manufacturing economy” and where truck driving is in the top 5 occupations statewide, is not debatable.

Next let’s examine how we will prepare for these Oil Shock Scenarios at the State and Local levels. Who is preparing? Who is not? Why not?