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By Robert Rapier on Nov 4, 2015 with 30 responses

Boom to Bust – 5 Stages Of The Oil Industry

It’s Not That Simple

In my previous article Why the Bakken Boomed, I discussed the shale oil boom that has had such a dramatic impact in North Dakota’s Williston Basin over the past decade. But throughout the U.S. shale boom there have been those who doubted that the production gains would prove anything other than fleeting. Those doubts were grounded in the fact that shale oil production is more complex and expensive than conventional oil production, and the fact that cash flow has been consistently negative for virtually all shale oil producers.

While the doubts are based on fact, the story is more complex than it may appear. Isn’t that always the case though? Things are never quite as simple as they seem. Superficially, the narrative for many has been “Shale oil isn’t economical. The wells deplete too quickly. Just look at the negative cash flow.” But it’s just not quite that simple. Let’s dig a little deeper to gain a better understanding of what has happened, what is happening, and what is likely to happen moving forward.

The Boom-Bust Cycle for Dummies

First it’s important to understand that the oil industry is cyclical, and more importantly to understand the reason that it is cyclical. The long history of the oil industry has been one of boom and bust cycles. During the booms we hear about windfall profits, but during the downward part of the cycle, oil companies lose a lot of money and many people lose their jobs.

So why is the oil industry cyclical? It’s not complex. It is a function of the capital-intensity of the business, and the multi-year lag time in getting projects executed. If you just want the executive summary, here it is. I have arbitrarily started this at the bottom of the cycle, and the 5 stages I have described here could be described at a more granular level with more stages:

  • Stage 1. At the bottom of the cycle, there is excess oil supply which results in low oil prices and a period of under-investment by the oil industry. Low prices also stimulate higher demand.
  • Stage 2. Demand grows faster than supply, leading to a tightening supply/demand balance. Oil prices begin to rise.
  • Stage 3. Rising oil prices mean oil companies start making money, and they ramp up investments in new projects. The higher prices rise and the longer they remain high, the greater the investments. New oil plays become economical, and new oil companies are formed. Some of these companies employ a lot of financial leverage, which is OK until…
  • Stage 4. Higher prices curb demand growth, and new projects begin to come online. Production growth begins to outstrip demand growth.
  • Stage 5: Prices collapse, and the oil industry contracts as capital expenditures are slashed. We return to Stage 1. The cycle is complete.

Keep in mind that some of these steps overlap in time, partially because the oil industry is made up of so many different companies with many different management styles. One company may still be investing heavily while another has already slashed spending in anticipation of falling prices.

We were at Stage 1 of the cycle in the late 1990s, when oil prices were bouncing between $20 and $30/bbl. In response to low prices, oil companies were conservative in their capital expenditures leading up to the early 2000s. In 2002 the price of oil slowly began to rise as demand growth outpaced new supplies and reduced the world’s spare capacity cushion. We were entering Stage 2.

chart (5)

Source: Energy Information Administration

We spent the early part of the past decade in Stage 2, but then most of 2005-2010 was spent in Stage 3. In 2005, the price of West Texas Intermediate (WTI) averaged $56.64, rising to an average of $66.05/bbl in 2006, $72.34/bbl in 2007, $99.67/bbl in 2008, but then falling back to $61.95/bbl in 2009.

Demand in the developed world started to decline in earnest in 2008. This marked the early stages of Stage 4, which was drawn out because of strong demand growth in developing countries (which kept global demand growing). But new production was coming online at a rapid pace in response to $100/bbl oil, and a supply cushion began to once again expand. In mid-2014, we entered Stage 5 as the price of oil began to collapse.

Negative Cash Flow — Losing Money or Reinvesting in the Business?

In 2005, most oil companies generated solid operating cash flow — defined as the cash generated by a company related to core operations. But as the shale boom accelerated, and with prices remaining high, oil companies went on a spending spree to get new projects implemented. Prices got so high that oil companies were investing every cent they could get their hands on to capitalize on the opportunity.

It’s easy to understand why they do it. Imagine you are running a business, and making very hefty margins on the products you are selling. You would likely want to plow your profits back into the business to grow sales as long as the margins are strong. If you are getting higher prices for your products each year, you are going to continue to plow that money back into growing the business. But this may very well put your business in a negative cash flow position even when prices are high.

As long as margins are good, you can grow your business rapidly. But what happens if prices collapse? It depends. If you grew by highly leveraging your business — in other words if you borrowed lots of money to grow it even faster – then you could be in trouble. If, on the other hand you don’t have a lot of debt to service and are able to slash your capital spending, you may be able to generate profits even though prices have collapsed.

As the spending spree ensued, cash flow turned solidly negative by 2009, even though the price of oil was higher than it was in 2005. A recent graphic by Oppenheimer tells the tale:

151030TEScashbleedoppenheimer1

When oil prices began to fall in mid-2014, companies began slashing capital expenditures. But they are slashing from capital expenditures that a year earlier were based on $100/bbl oil. Oil prices have fallen so far, so fast that essentially all oil and gas companies are still in a negative cash flow position despite the cuts they have made (except of course the refiners, who benefit from low oil prices). And they are slashing based on projections of where they think oil prices will be in the future. Different companies will have different ideas of where oil prices are headed and different levels of indebtedness, so they will naturally differ in how aggressively they will prune capital expenditures.

Shale Oil Economics

History argues that, even if oil prices remain near $50/bbl for an extended period of time, some companies will be able to rein in costs enough to generate free cash flow as they did in 2005. Of course the counterargument is that it costs more to produce oil in 2015 than it did in 2005, when companies had positive cash flow with WTI at $56.64/bbl. After all, it took higher prices to enable the shale oil boom, and therefore it stands to reason that it will take higher prices to keep it going.

Let’s first consider the economics of producing oil from a shale play. (For a more detailed explanation, see Art Berman’s recent Forbes article Only 1% Of The Bakken Play Breaks Even At Current Oil Prices).

Broadly speaking, the economics of oil production hinge on the cost to drill and complete the well, and the amount of oil, gas, and natural gas liquids that are obtained from the well. There are also other expenses involved, such as operating costs, taxes, exploration costs, etc. But let’s focus on the cost to drill and amount of oil produced.

If an oil producer spends $5 million to drill and complete a well, but only recovers 100,000 barrels of oil from that well, then that’s $50/bbl just on the drilling and completion costs. If, hypothetically they could produce 1 million barrels from that well, then it’s just $5/bbl on drilling and completion costs. Thus, the amount of oil ultimately recovered has a huge impact on the cost of production.

In the early days of the shale oil learning curve, the wells were more expensive to drill and complete relative to the production levels that were being achieved. As operators gained more experience by experimenting with the number of fracking stages, the amount of sand, etc., they lowered their cost of production. A 2009 filing by Brigham Exploration — later acquired by Statoil (NYSE: STO) — demonstrates how oil well economics improved as more hydraulic fracturing stages were introduced to horizontal wells:

151019TESfrackingdemo

Source: Brigham Exploration SEC filing

This shows that within four years or so this company was able to reduce the cost of producing a barrel of oil in the Bakken by more than $25/barrel of oil equivalent (BOE). (Note that this is only the cost to produce; it doesn’t include operating costs, etc.). Thus, what may have only been economical at $100/bbl in 2006 could have been economical at $75/bbl by 2010. By 2014, many were claiming that the break even cost had fallen to $60/bbl or even lower.

But that’s an industry wide estimate. As Art Berman explains in his article, there are a few Bakken wells that are breaking even with Bakken oil prices in the low $30s (and WTI in the mid-$40s). But those wells are the most productive wells in the Bakken Formation, which drives down the cost per barrel for drilling and completion. Industry wide, it’s probably going to take WTI prices of at least $60/bbl before the average Bakken well breaks even. Of course that’s an average; some operators will still be in trouble at that price while others will start to generate positive cash flow.

Fast Depletion or Fast Production?

So what about the notion that fracked wells deplete too quickly, and that is why they can’t be economical? I have heard this justification repeated many times, but again reality is more complex. First, it isn’t a mystery to the companies drilling these wells that they deplete quickly. What they are interested in is the estimated ultimate recovery (EUR). If you are familiar with the time value of money, you would like to have your investment paid back as quickly as possible. So if I have a well that is going to produce 500,000 barrels during its lifetime, do I want a slow and steady depletion to zero? No. As an operator, I want to get that oil out as quickly as I can without damaging the well and reducing its ultimate production. Where some see fast depletion as a problem, another way to look at it is that you got most of the available oil out quickly. (Note that some operators are experimenting with throttling wells early on to determine whether that increases the EUR).

Conclusions

The history of the oil industry has been one of cycles, from nearly the beginning of the industry in the 1850s through today. In the down cycle that we are currently experiencing, demand rises due to low prices, even as oil producers begin to cut capital expenditures. U.S. shale production has already begun to decline as very little shale oil production is currently profitable. The end result is very predictable, even if the timing is not. While there is broad agreement that a great deal of U.S. oil production is currently unprofitable, some feel like oil prices need to fall further to make a bigger dent in production because crude oil inventories are still quite high. I feel like with the continued growth in global demand, we can already see the supply/demand picture tightening on the horizon. When that becomes broadly obvious, oil prices will again rise, bringing profits to the industry and higher capital spending on new projects. How long that process takes will determine how many oil companies are left standing to reap those profits.


Link to Original Article: Boom to Bust – 5 Stages Of The Oil Industry

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

  1. By Todd McKissick on November 5, 2015 at 9:10 am

    ….unless the renewables and fossil divestment movements keep demand below production – a process that’s not only gaining but accelerating.

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    • By Robert Rapier on November 6, 2015 at 10:56 pm

      Well, all the fossil divestment could possibly do is impact supply by making it harder to access capital, but that’s a long shot. Further, even though renewables have grown, they haven’t really made much headway against oil because demand is growing faster than renewable capacity has been added. So oil demand continues to grow. That’s why I didn’t really go into that possibility.

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      • By Todd McKissick on November 7, 2015 at 1:39 pm

        I’m not sure I agree. Divestment usually goes toward renewable to boost them more. And renewable have two advantages often missed. They are cumulative – adding one adds that for every day forward plus they are still undergoing exponential growth.

        And other than China, I see demand as flat. With their new renewable push, that could end soon as well.

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        • By Robert Rapier on November 7, 2015 at 2:09 pm

          “And other than China, I see demand as flat.”

          But that’s not in fact what the data shows. Demand is up in every developing region of the world. It’s only down in the developed countries, but it’s up so much in the developing countries that it continues to grow overall.

          I can see that I didn’t update this following this year’s release of the BP Statistical Review, but the trends in the charts I show here were consistent in this year’s report: http://www.energytrendsinsider.com/2014/07/10/world-sets-new-oil-production-and-consumption-records/

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          • By Craig Teller on November 8, 2015 at 7:45 pm

            You’re right about demand being up in 3rd world countries for fossil fuels. But there are many dynamics at work. China, for example, wants to be able to sell its alternative energy products such as solar panels, and there are third world countries where they have better business relationships than Europe or the U.S. Given its own needs, China certainly doesn’t have all that much oil to sell. Selling energy in the form of solar panels may have its appeal.

            The question I wonder about is whether the Chinese may decide to sell their coal to other countries as they move quickly more and more to alternative energy. The central government, for example, may say no, but Manchuria may find a way to ignore the central government as more and more mines shut down.

            There are also questions about China’s contract with Russia over natural gas. More than likely, the Chinese will honor the more near term parts of the contract but pass on terms that are optional or possibly ignorable. We’re seeing things on large scales, but any individual action might not have that much impact on prices and sales, and yet they could have long-term impact.

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  2. By Edward Kee on November 5, 2015 at 10:16 am

    Robert: This is excellent – many thanks for taking the time to write this up!

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  3. By Craig Teller on November 5, 2015 at 6:18 pm

    Robert, you’re one of the few guys I turn to when I want to better understand this stuff. Thanks for the analysis. I can see, for example, a new perspective on Chesapeake that explains the odd behavior of the company a few years back. That was a lot of debt they built up.

    Going forward, a lot of factors start coming into play. The prices of solar, wind, storage systems and energy efficiency technology are all falling and are now competitive and will remain competitive. It is unlikely that the costs of oil production, wherever it happens, are going down much further. Given the double digit growth of alternative energy, fossil fuels in general have a problem, though natural gas for a while might be off the hook (can you give us a specific read on natural gas going forward?).

    No one knows exactly what is going to happen in the next twenty years. We’re clearly going through an energy transition. In a sense, that’s probably been true since 1970 when U.S. oil production maxed out. If the volatility of the last 45 years is any clue, the next twenty years, at least in fossil fuels, are probably going to be more volatile.

    Two more things:

    1) I get the sense that Saudi Arabia is thinking long-term and plans on being the last oil producer standing. Do you have some thoughts on what’s happening with them?

    2) Clearly, oil has played a major role in creating the modern world as we know it. But global warming has a potential of being a bigger deal than we thought. It is not unimaginable that carbon dioxide might have to be withdrawn from the atmosphere to keep temperatures from going too high. This is actually a potential opportunity for some who have the drilling equipment and the skills, particularly if there are safe places to put carbon dioxide in the ground. Those who can spot such locations might have a new career in 15 to 20 years.

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    • By Russ Finley on November 7, 2015 at 3:04 pm

      Given the double digit growth of alternative energy, fossil fuels in general have a problem…

      Globally, which is what matters when talking about global warming, the sum of non-fossil fuel energy sources (low carbon sources) are not making any progress when it comes to emissions reductions (are presently well below 1985 percentages). The chart below is for electricity generation as opposed to emissions reductions but it paints the general trends.

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      • By Craig Teller on November 7, 2015 at 8:58 pm

        Russ, we can quibble about numbers but the only numbers for wind that really matter are after 2000 and the only numbers for solar that matter are after 2010. Thanks to recent innovations, solar and wind are growing at significant double digit rates.

        Coal is already feeling pressure from alternative energy, though admittedly natural gas is reviving and in places the energy source replacing coal. But worldwide coal production will almost certainly drop before 2030. A major driver of this change is China as it turns to solar and wind.

        It’s dangerous to predict what will happen to crude in the next fifteen years, but it’s almost certain the rules will be changing. But the age of explosive growth in crude is probably over. Prices will probably remain volatile. But Robert knows much more about that than I do.

        Here’s one key showing up worldwide that can’t be ignored. Financing for solar and wind is getting cheaper. Add cheaper financing for solar and wind to the recent innovations — and more innovations to come — and double digit growth will continue. Anyone with a cheap calculator can figure out how fast double-digit growth can take over technology growing in single digits.

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        • By Optimist on November 8, 2015 at 12:37 am

          Not quite.

          According to Russ’ graph solar is at ~1% and solar at ~3%. Rounding errors. Double digit growth means a slightly bigger rounding errors.

          Fracking gas is what is killing coal. Renewables are a side-show. A convenient sideshow for some, but a sideshow all the same.

          Banksters already have way too much say. Even a slick bankster cannot make a dud project work. But, hey, if you have money burning a hole in your pocket they can find an investment that suits your needs, for a nominal fee, of course…

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          • By Craig Teller on November 8, 2015 at 3:23 am

            Optimist, three years ago I would have largely agreed with you. But things have dramatically changed. And will continue to change. I notice most critics of solar and wind fail to realize how much prices have dropped due to innovations. Nor do they realize that prices will continue to drop. When a large consumer like China starts installing more than 10 gigawatts of solar a year, and 23 gigawatts of wind a year, there’s a shift going on. It isn’t much different than Henry Ford in 1912.

            We all know this isn’t going to happen overnight. But it’s happening. Third world countries are also discovering that alternative energy like solar is scalable. If a business owner can only afford one shift a day for his business, solar works just fine. Anyway, what business owner or a group of business owners in many of these areas can afford to finance a $1 billion power plant like the one Enron tried to sell to India?

            I don’t know how long oil will continue to manage a price under $50/barrel. In a way, it doesn’t make sense anymore. Since 1970, most price hikes in fossil fuel prices have done more harm than good to the world economy. Look, we’re in a major transition. Everyone knows it. Oil will be around awhile longer. It’ll be interesting to watch.

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            • By Forrest on November 8, 2015 at 7:55 am

              I was reading a MIT report on future of the Grid. A extremely well sourced document of which the best I’ve seen to date. Some of the points that stood out for me.

              . EV cars are a problem for grid and will cost consumers higher rates and decline capacity utilization

              . AC the primary problem for seasonal load variance.

              . AC responsible for 40% of peak load and increasing.

              . Wind and solar will be a big problem for grid as well as the small quantity generator.

              .New York and New England demand exceeded 70% of it’s peak for only 1,000 hours. So 30% of capacity was only utilized 12% of the time.

              . Country is losing industrial consumption of power that worked to stabilize grid per 24×7 high power use.

              . Line loss = 7%, historically as high as 16%

              . Smart grid technology will help, but slowly implemented

              . Feds should increase FERC authority to enhance power line siting for transmission of power across federal land, states, and coordinating with neighboring countries.

              . Implement dynamic pricing of power for all consumers, AMI.

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            • By Forrest on November 8, 2015 at 8:12 am

              A.C. appears to be the beast to quell for lowering the growing peak demand. Visit the annual ASHRAE at McCormik convention center in Chicago. Many booths plugging off peak ice cube solution to A.C. needs. It’s a low tech approach and not costly. Why doesn’t this approach get promoted upon national priority? Not sexy enough for Environmentalist that are promoting their cherished solutions? I’m thinking so. Also, seasonal heat storage can be very powerful environmental solution.

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            • By neroden on November 28, 2015 at 11:10 pm

              Reversible heat pumps are very popular for AC now, because they can be used for heating as well. They’re quite efficient — they’re measured in terms of COP. A COP of 2 means that 1 unit of electrical energy gives you 2 units of heating energy! Really.

              Current best practice units have COPs over 5. Theoretical max is 8.8.

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            • By Forrest on November 29, 2015 at 7:27 am

              Ground heat pumps are the competition to natural gas heating for northern states. Only, those with money to burn will justify the purchase. Very costly install, costly maintenance, and repair. Electric utility cost expected to zoom and reliability decrease. Natural gas cost is expected to be low cost for decades and very stable. Cooling is not a cost concern.

              More utilize plain fire wood as compared to geothermal. The fuel is cheap or free. Most of it classified as waste. The fuel an excellent back up system for cooking, heating when all else fails. Very comforting heating source.

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            • By Craig Teller on November 8, 2015 at 6:43 pm

              Forrest, I wish you had included a link, if that’s possible.

              Here a response to your items.

              Pure EV cars will be growing at a slower rate that hybrids for some time. I wouldn’t put a time on it because of the rapid progress, plus occasional roadblocks. Nevertheless, by definition EV cars are going to need more juice from the grid, but areas where EV cars are selling well are already expanding power production. An important example is the corridor that runs from Seattle to San Diego.

              Hybrids are still using gasoline, but the mpg is increasing. A hybrid Prius with room for 4-5 people getting 50 mpg in all kinds of terrain is already pressure on the oil business. A plug-in hybrid adds more pressure. The proper way to think of a hybrid is that it’s the Stanley Steamer, which actually sold reasonably well before being replaced by cars with internal combustion engines (my great-grandfather had one). Hybrids will eventually be replaced by electric.

              AC will require some rational changes that should have been pushed harder for years. Better coolants are coming. Better insulated new homes should already be standard. I’m not talking high costs but poor equipment and poor insulation leads to money out of the pocket and adds up. That’s one issue. It has less to do with economics than how we think. Finding new ways to use methane instead of flaring it is the new way of thinking.

              Guess which alternative energy does quite well when there are peak loads? Solar. Solar does quite well during the hours AC is needed. Guess which energy source, solar or fossil fuels, is cheaper during peak hours? Solar. This has been established in Germany. This may not translate fully to the U.S. but it shouldn’t be a big problem.

              Germany is already doing a good job of figuring out grid issues. General Electric and Siemens have been working on new computer programs and related equipment that are dealing with these issues, including minute to minute demands. As long as some conventional sources of energy remain, there is no problem. That includes hydro, and geothermal, if available. Some storage systems are probably needed when going totally with wind and solar. The issue of the grid is already considered less of a problem than once thought.

              Line loss I don’t really get. 7-16% losses seems ripe for improvement. For now, I can understand it for wind. But solar should be close to where it’s needed. And it’s time for solar to fit in better with architecture.

              I approve of profits and hard work. But when profits actually make things more expensive, something has to break the bottleneck that makes excessive profits possible. Alternative energy is subject to some of this like fossil fuels. Break the bottleneck. One way is to make sure customers have choices. Another way is to make sure small energy suppliers, even farmer coops with windmills, can enter the market and outsell long distance suppliers. Germany has also done groundbreaking work in this area.

              I’m not an expert on this stuff. But I follow conventional energy issues, alternative energy, global warming and the many interesting foreign policy permutations now showing up.

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            • By Forrest on November 9, 2015 at 6:29 am

              The report is well known and has attracted it’s share of criticism.
              For one, the basis is a non constrained carbon grid. No assessment per health or government regs. But, it’s a very good assessment of the grid per the mechanics of operation. The report claims the grid is in relatively good shape and no dire consequences need occur if progressing with solutions.

              https://mitei.mit.edu/system/files/Electric_Grid_Full_Report.pdf

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            • By Forrest on November 9, 2015 at 7:05 am

              I like to have personal data to compare with the experts. Last week evaluated solar on RV trailer. The option is popular for those seeking boondocking (off utilities) capability. Well, it is a good snapshot of real costs as the RV is akin to small house and the prices are void of all subsidies. So, it’s a snapshot of old vs new technology and the advantages of real worth. The solar setup is very valuable to RV’s and if anyone could justify the expense this more affluent crowd could. But? Wow! This is the actual out of pocket cost for a very savy shopper.

              $3,007 960w solar cells
              $2,200 labor
              $642 controller
              $4,480 700ah lithium battery pack
              $1,800 labor
              $2,223 inverter
              $1,300 labor

              The advantages of solar and lithium are high. Lighter, quiet, long lifespan, “free”, etc., but if someone is suggesting the investment is superior, well that would be laughable. This is why 99% of the RVs out their utilize conventional low cost lead acid batteries and low noise generators. Most just run the LED lights and TV with lead acid battery and utilize propane for the rest. Some will utilize the generator for A.C. and battery recharge. Actually, I can’t see how auto manufactures can justify lithium batteries? It would appear a superior solution for high value mild hybrid auto technology would be to utilize a two pack of deep cycle batteries under the hood, replacing the common auto battery. That would improve the cost vs value justification of hybrid technology.

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            • By neroden on November 28, 2015 at 11:11 pm

              That’s $5300 in labor. Seems like too much. Apparently US solar installation costs are way out of line too, FWIW, and it’s all labor costs.

              The reasons lithium batteries are preferred over lead-acid are (a) long life and (b) higher energy density per kilogram and (c) high power output and (d) non-toxic. That’s a lot of reasons.

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            • By Forrest on November 29, 2015 at 8:03 am

              They list those advantages of lithium, but consumers that compare cost vs value will choose lead acid battery.

              I’m going solar with my RV camping. But, the demands of RV are severe compared to residential. Boon docking is attractive alternative, but puts a premium on power generation and storage needs. The typical camper energy needs are well thought out and balanced for hooking up to utilities, traveling, or boon docking. They utilize DC and AC power as well as propane fuel. Energy storage per battery, propane tank, and the conventional vehicle fuel tank. Light weight and less noisy generators typically utilized when not hooked up. These generators horribly inefficient compared to grid power plant generators. They also utilize expensive gasoline fuel that is taxed for road use. This supplemental power will cost $30 to $100 per month. I can easily justify a solar power for this cost. It’s very attractive to keep the solar system simple and minimal. Cost such as above can climb quickly if attempting to power the RV similar to grid hookup. Instead a balanced cost effective approach would be to utilize propane for heating and cooking needs. DC for low kWh hardware of lighting and entertainment. Also water pump and refrigerator. The traditional RV refrigerator will operate with propane, but at a cost of $30/mo. Evaluate the expensive Sunfrost super efficient refrigerators and you will be shocked at low energy needs. This investment should be the number one purchase of Environmentalist or those looking to save utility bills.

              The simple solar system big enough to meet my needs costs $500. It’s a frame mounted single solar panel. It’s easy to hook up or store and secure the unit. It can be moved and adjusted to capture maximum sunshine. Solar is very effective upon charging batteries more so than power generator. Solar has no operation restrictions for quiet needs of campground. AC is not an option for this system. If AC becomes a common need, best to relocate.

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            • By neroden on November 28, 2015 at 11:10 pm

              EVs are being adopted more slowly than solar. They’re at least 10 years behind…

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          • By Scott Drysdale on November 19, 2015 at 8:56 pm

            You are on the right track…

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          • By neroden on November 28, 2015 at 11:08 pm

            It’s not just double digit growth. Solar is doubling every two years. Solar at 2% in 2015, 4% in 2017, 8% in 2019, 16% in 2022, 32% in 2024, 64% in 2026.

            I don’t see any bottlenecks on the horizon until we need to cover the full nighttime load.

            Wind’s actually doubling every three years or so, but it does have a natural production limit.

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    • By Russ Finley on November 7, 2015 at 3:19 pm

      <blockquoteBut global warming has a potential of being a bigger deal than we
      thought. It is not unimaginable that carbon dioxide might have to be
      withdrawn from the atmosphere to keep temperatures from going too high

      I think you may be right in that it does not look like we are going to reduce emissions from our power sources enough to make much difference. Not sure pumping it underground will be an alternative. I just created the graphic below to put things into perspective

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    • By Russ Finley on November 7, 2015 at 4:09 pm

      Some last thoughts …

      The prices of solar, wind, storage systems and energy efficiency
      technology are all falling and are now competitive and will remain
      competitive.

      Solar

      When we talk about solar we have to define what kind of solar. Certainly, the thermal projects like Ivanpah (that were given government land and are now sitting on what was recently intact desert ecosystems incinerating anything with wings) are not proving to be economically competitive. Another one of those may never be built.

      Neither is residential rooftop solar in most instances. Using the National Renewable Energy Lab estimator, sans subsidies, the average Floridian would pay about $30K more over the life of the panels than staying with grid power and I would lose about $70K.

      Utility scale photo voltaic is less expensive than residential rooftop, but still not competitive in most places.

      Solar thermal for residential hot water has a very hard time competing with $500 electric or gas hot water heaters.

      Storage

      There is no economically competitive utility scale storage technology on the horizon. Certainly, batteries for electric cars are getting better fast but using those batteries to store a night’s worth of energy from a wind farm would cost a large fortune. Using the Tesla packaged Panasonic batteries to store enough solar energy to take my house off-grid would cost me well over a million dollars. Pumped hydro is used to a small extent, mostly by nuclear in this country, but is generally, also very expensive and not particularly expandable.

      Wind

      Wind is actually competitive with natural gas at this time. So, one might ask, why don’t we ditch solar, gas, coal and nuclear and just use wind? Nobody plans to just use just wind for all of our energy needs for many obvious reasons I don’t need to detail.

      So, depending on what websites we choose to visit, we can get very different perspectives about the progress being made by (pick a verb–unconventional, renewable, sustainable, low-carbon, non-fossil) sources of energy.

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      • By neroden on November 28, 2015 at 11:03 pm

        Utility scale solar is already cheaper than all other forms of new-build electrical generation other than wind, and it’s *still* dropping in half every two years. You really do have to pay attention to the current state of affairs. Even the utility companies have noticed; in competitive bids, solar is winning.

        Residential rooftop solar competes with retail rates, not wholesale rates; it will continue to have high adoption in places where the charges for the transmission grid are very high (such as Australia).

        By the way, you must have an extremely wasteful and inefficient house. It would cost me about $50K to use Tesla batteries to go completely off-grid, and I consider myself a high energy user. Try getting your house super-insulated; the tech has been available since the late 1970s.

        Some people, apparently including you, don’t understand exponentials. At current adoption rates, daytime US electricity use will be 100% solar in about 2028.

        There’s no reason other countries would be idiots about this; they’ll pick the cheap stuff.

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  4. By Forrest on November 8, 2015 at 7:35 am

    Adding to the complexity of the oil supply market economy would be the government incentives. The long established belief that government was needed to push oil supply to maximum height for good of country resulted in magnifying these swings that naturally occur upon ever changing balancing act of supply vs demand. Government best utilized to stabilize the market and not throw gasoline upon the fire. Incentives should be predictable, steady, and invoked with loss of needed production. Also, incentives tapering off upon a few upticks within increasing supply. Government regs should maximize industry need and ability to balance the equation. That would mean the stupid Jimmy Carter regs making exports of oil illegal should be axed as their primary importance merely political juice for constituency. Such thinking skills could also convince constituency of making it illegal to export cars we will get cheaper cars. Chavez would have agreed.

    Government works best to coordinate national efforts, but not upon a dictatorship, but of a facilitator to pull those business and consumers together for best results for consumers and investors. Standardization, normalizing, setting up a forward leaning trajectory, setting priorities, maximizing small business and consumer influence and benefits. Pipeline, power line, and roadway construction should be a maximum concern of fed to make country more efficient. The blockage of Keystone just political juice of which the country’s is currently suffering way to much from.

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  5. By Rob Kay on November 16, 2015 at 5:51 am

    Electric vehicles are a gamechanger, because they cost far less to run than petrol cars, and are far better for the climate and environment, as well as human health. So, just as the coal industry declined, oil will decline, resulting in further falls in price.

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  6. By neroden on November 28, 2015 at 10:58 pm

    Cheseapeake Energy has a history of advertising first-year production while not disclosing fast decline curves. They also have a history of selling their wells just after first year production.

    One might conclude that their business model is defrauding other oil companies.

    Unfortunately, the evidence is that most of the companies fracking for *dry gas* (as opposed to oil) have been doing this from day one. The price of natural gas per unit of energy has gotten *much lower* than the price of oil, perhaps because we have less oil available and a lot more gas.

    The Bakken and Eagle Ford oil may be profitable for some operators — the Marcellus seems to be unprofitable for nearly everyone. Except those who flipped the land and got out early.

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  7. By aseasonforreason on November 27, 2016 at 4:39 pm

    I’d personally advocate for the inclusion of higher-risk projects being sought and engaged in when prices are high and demand is high. I imagine that this is Stage 4, but maybe starts in Stage 3?

    We dodged a bunch of dangerous bullets with development projects we are NOT ready for with the most recent bust of the oil prices, including here in Alaska.

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