Disruptive Technologies? Really?!

My dear old friends from McKinsey & Company have come up with their view of the world's top technologies.  As a historical note, beginning in the mid 1980's and through the 1990's, McKinsey was instrumental in irreversibly damaging the U.S. oil and gas industry.  McKinsey was hired by the scared oil & gas managers to do a hatchet job on the researchers and operations staffs across the U.S. and - for a lot of money - did a awesomely devastating job.

Suffices it to say that the oil and gas industry in the U.S. will never again have the same breadth and depth, ever.  This statement of fact has some interesting connotations when it comes to operating in the ultra-difficult, super-inhospitable environments, which seem to enter into our future.  In fairness to McKinsey and several other consulting outfits, they acted as expensive mercenaries used by management to execute (no pun intended) the already agreed upon plans, as in: "What do you want me to conclude, boss?"

But I digressed.  So here is how the research arm of McKinsey, their Global Institute (MGI), sees potential benefits from a variety of technologies:

By 2025, these 12 technologies identified by McKinsey have the potential to deliver economic value of up to $33 trillion a year worldwide.  Source: The New York times.  Image based on Exhibit E3 in McKinsey's 178 page report, "Disruptive Technologies: Advances that will transform life, business, and the global economy."

The sumptuous, 178-page report by MGI is full of colors and smart information that ought to daze you, just as it dazed me until I came across Exibit E2, and in it a boast about "3x increase in efficiency of U.S. gas wells between 2007 and 2011 [due to] advanced oil and gas exploration and recovery":

Among others, Exhibit E2 in the MGI Report claims that the efficiency of U.S. gas wells has increased by a factor of three between 2007 and 2011.

Suddenly, I grew curious just how exactly the three-fold increase of efficiency of U.S. gas wells was calculated.  Would this be a 3-fold increase in the efficiency of gas production per new well compared with old wells?  Which new well?  What old wells?  Over what interval of time?  A month?  A year? How does one define "advanced"?

Since I do not have the resources of MGI to carefully analyze the entire gas production in the U.S., let me focus on Texas, the largest gas producer in the U.S.  Luckily, the Texas Railroad Commission provides easily accessible well production data which allowed me to construct the following plots:

The total rate of gas production in Texas over the last 80 years in Tscf/year.  Note that today Texas produces 1/3 of U.S. gas consumption. Also note the fundamental Hubbert peak in 1972 or so.  The most recent, separate peak is due to a new resource: The Barnett Shale.  This recent production increase was achieved by drilling some 16,500 mostly horizontal wells, and the average production per Texas gas well continued to decline as shown in the next plot. Data source: Texas Railroad Commission.

Production rate of an average gas well in Texas in millions of standard cubic feet per day versus time.  This figure was obtained by dividing the total gas production rate reported in Texas for a given year by the number of active wells in the same year.  If the current trend of production decline continues, an average gas well in Texas will produce nothing 27 years from today.  Data source: Texas Railroad Commission.

One might argue that this plot is not definitive, because the production decline in tens of thousands of older gas wells more than offsets the new production from the fewer new, more productive wells.  So how about plotting an increment of production in a given year, divided by the number of new wells that were put on production in the same year?  Well, here it is:

Incremental gas production rate in a given year per incremental well that came on line in the same year.  The big spike in the 1970's corresponds to the peak of gas production in Texas. It is followed by an even more rapid decline.  If one disregards the second spike in the early 1990's, the incremental gas production per incremental gas well in Texas has been either constant or slowly declined over the last 30 years.  There was no 3X increase of productivity as stated in the MGI report. The only explanation for the MGI claims I can think of is that the flash, initial production from the new massive horizontal wells is many times more that from the older wells.  But these horizontal wells also decline much faster, at 20-40% per year. Thus, MGI experts may be confusing a few individual trees with a large forest. Note that this plot approximates the derivative, dq/dn, q being the gas production rate and n the number of active gas wells;  hence the spikes.

Now, let's look at the total production of dry natural gas in the U.S. since the beginning of accounting:

Historic production of dry natural gas in the U.S. resolved into several Hubbert cycles.  One EJ/year is about 1 Tscf/year. Nothing short of miracle, the U.S. is the only country on the Earth able to create a secondary Hubbert cycle that was almost as large as the fundamental one that peaked in 1971.   Much of the production rebound came from offshore wells in increasingly deep water. The recent shale and tight gas revolution thus far has added the rightmost spike.  Note that the sum of the current Hubbert cycles declines very rapidly in the near future.  Therefore, without continued incredibly intensive drilling, the U.S. will not be able to maintain its current gas production.

As the plot above shows, petroleum engineers in the United States, created a miracle and maintained essentially the 1970 peak level of gas production for another 40-50 years. This epochal achievement has been largely unnoticed by the public. However, the laws of nature being what they are, will not permit a continuation of the past exponential increase of production rate:

This semilogarithmic plot of gas production rate in the U.S., shows the uninterrupted exponential increase of the rate for 80 years (the red line denotes exponential growth at 6.6 %/year). Note that production rate has stabilized after 1970.  This curve reflects the miracle of U.S. gas technology.  This miracle was not duplicated by any other country on the Earth,  but there is no 3x growth of well efficiency anywhere.

So far, I have shown you that the gas production claims in the McKinsey report seem to be exaggerated. I could repeat the same analysis for oil production, but I will spare you. Why spend so much time chasing nonsense?

But wait, there is more of more insidious nonsense. Let's look at the MGI claims that the mobile internet, automation of knowledge work (as in layoffs of professionals), internet of things (as in shutting down small stores around the world), cloud, advanced robotics (as in layoffs of industrial workers), etc., will  increase the current global GDP of roughly 70 trillion USD by 50%.  Just think about it:  MGI hopes to increase the world's GDP by 1/2 by replacing people with technology.  How exactly will these people retain their buying power to gorge on the new Internet of Things?

What do these technologies have in common? Oh, yes, they all use astronomical quantities of electricity and other forms of mostly fossil fuel power, as well as clean water and rare-earth metals.  Without the cheap, reliable, uninterrupted fossil fuel power, ample clean water, and more rare metals than exist on the Earth, the projected growth of these resource-devouring technologies will remain on the glossy pages of MGI reports. So how does one square their estimate that the fundamental enabling technologies (oil and gas exploration and production) will contribute a measly 0.6 trillion of U.S. dollars, but their high-order derivatives will contribute tens of trillions of dollars?  Isn't it all upside down?  Like an inverted pyramid of the increasingly imaginary activities of our society, such as insurance and financial services?

An inverted pyramid of activities of a modern society.  Those that matter the most, agriculture and forestry, mining, oil & gas recovery , and utilities are at the very bottom in terms of their importance, while finance is at the top. No wonder that this pyramid is unstable and must tip over. Image adpated from  Dr. Kurt Cobb, www.resilience.org/stories/2007-07-29/upside-down-economics

In summary, there is much more to life than staring at your iPhone that is connected to the Cloud and the Internet of Things.  Too many experts from McKinsey and elsewhere seem to think that life is like an iPhone screen.  But here is the bad news: Life does not care about iPhones, iPads, and similar.  Life will go on regardless and the upside-down pyramid will fall as it must, no matter how hard people like me and their children will try to slow down this fall.

P.S. Unnoticed by MGI, but a truly disruptive technology that has just surfaced is the illegal, genetically modified wheat with the glyphosate  (Roundup)-tolerant genes.  My other old friends from Monsanto introduced this wheat to the West Coast, and totally disrupted U.S. wheat exports to Japan and South Korea.  They also disrupted lives of thousands of farmers and agricultural service workers in Oregon and Washington State. Oops! But these temporary difficulties might be considered as necessary sacrifices needed to arrive at a futuristic supply of truly inedible food in the U.S. In the long run, this new food supply will  make us die faster and thus stimulate the new economy of things.

P.S.P.S. The smart people from the uppermost shelf in the figure above have now figured a way of manipulating resource prices.  Goldman Sachs is in the food commodities, aluminum and oil business, and J.P. Morgan is in the copper business.  All banks derive huge profits from keeping the oil price as high as possible and loaning money to the oil companies to start projects that would be impossible if the oil price were lower than, say, $70-80 per barrel.  Have you noticed that price volatility has all but disappeared from oil trading since that summer of 2008?  The big boys are making sure that no one disturbs them from making money quietly. Many tens of billions of dollars per year. This is how wealth is transferred even faster from the base of the pyramid to the top.  Now, that's a truly disruptive technology! Sort of like the invisible Ethernet of Things that translates physical goods into electronic cash to do even more damage.  Or like a 3D printer to print money from nothing.

Energy Exports May Not Be Good

On May 17th, 2013, Joe Nocera of the New York Times wrote an editorial, Energy Exports Are Good!  In it he follows the classic paradigm of neoliberalism: Let the "markets" decide what will happen with natural gas and let us export it if someone so desires.

According to Wikipedia, neoliberalism in economics was originally coined in 1938 by the German scholar Alexander Rüstow at a colloquium that defined the concept of neoliberalism as “the priority of the price mechanism, the free enterprise, the system of competition and a strong and impartial state.” To be "neoliberal" meant that – in the name of liberalism – a modern economic policy was required.

So far so good, especially if everything can be traded over infinitely long times (centuries for us) with a perfectly smooth substitution of one resource for another and one product for another.  But this assumption does not hold for depletable resources, whose production does not adjust easily and instantaneously to demand.

I am always amused to see a plot like the one below, whether it refers to neoliberalism or some other simplistic, unrealistic concoction by economists.

A nice plot of linear demand and linear supply, with no delay and no saturation.  While this simplistic, static approach makes economics courses easier, it does not reflect the long-term reality of depletable resources.   Source: Wikipedia.

Judging from the birthday and birthplace of neoliberalism (Germany and Austria, 1938), would the "strong and impartial state" be expected to go to war to secure resources for the economy?  A year or two after 1938,  members of my family were put into concentration camps, became slave laborers, and were executed by the Nazi Germans and Soviets. In the leading Italian economic model, Fascism (from Latin fascio, a bundle or bouquet) was a synonym of seamless collaboration between corporations and state.

So let's look at Margaret Thatcher's United Kingdom (1979-1990) that pursued the neoliberal economic policy with gusto.  Here is the U.K.'s oil production, consumption and oil imports/exports until 2005:

Margaret Thatcher became the Conservative Party Prime Minister when the red and yellow curves crossed and was ousted by her party when they touched again. By the time U.K.'s North Sea production is over, U.K. will have produced at least 25 billion barrels of oil and exported roughly 6 billion barrels, or 25%.  The production and consumption curves crossed again in 2005.  You must be dying to learn what happened later. Image source: An OilDrum post by Euan Mearns, Oct 3, 2006.

Since you must be curious about what happened with U.K.'s oil exports after 2005, here is a recent update from the DOE's Energy Information Administration (EIA):

U.K's exports/imports through the year 2012.  Since 2005, U.K. has had to import ever more crude oil. Here two populations of reservoirs could be resolved with two Hubbert peaks. Source: EIA, accessed May 18, 2013.

From the data it follows that U.K. embarked on an aggressive field development and exported oil between 1980 and 2005.  The first peak in exports followed oil price of the day, but the second one occurred when oil price was very depressed.

Now imagine this: What would happen, if U.K. slowed down its production and did not export oil between 1990 and 2005?  I understand that this type of thinking is absolutely foreign to most everyone in the U.S. and would be dismissed as "socialistic talk."  Why think about future, when one can make a quick buck today?

Which brings me to Mr. Nocera's hot appeal to export each year one or two months worth of U.S. gas production.  Is this a wise idea?  Is it perhaps more profitable to use this gas to power a thriving steel and petrochemical industry?  Couldn't we export instead the high value added digital tool machines and complex industrial products, such as planes and cars? Shouldn't we be using the extra power from natural gas to mass produce solar photovoltaic panels and solar water heaters on most roofs in the U.S.?  Introduce U.S. to an early twentieth century in mass transit?  In short, shouldn't the U.S. have an industrial and social development policy, like Germany, Norway, or even China?

And as a sobriety check, here is what really happened with U.K.'s natural gas production and exports:

Natural gas production in U.K  The rapid production increase lasted for 12 years, followed by an equally steep decline. What you see here is a yet another classical Hubbert peak of production. Source: EIA, accessed May 18, 2013.

Natural gas exports/imports in U.K Since 2004, U.K. has become dependent on gas imports at an accelerating pace. Source: EIA, accessed May 18, 2013.

The neoliberal idea of exporting natural gas was good while the supply lasted, but today U.K. can barely replenish its stocks of natural gas by paying over US $10 per million BTU.  Of course, today Great Britain is dangerously close to a failed state and it's former glory will never be restored.

Now, do you want to compare the outcomes of the British neoliberal policies with the Norwegian brand of socialism?  Perhaps not, because this comparison is not kind to Margaret Thatcher and Company Limited.  Very limited it turned out, despite a jolly good little war in the Falklands.

P.S. Financial Times, UK gas supply six hours from running out in March, by Gill Plimmer and Guy Chazan, May 23, 2013:

Britain came within six hours of running out of natural gas in March, according to a senior energy official, highlighting the risk of supply shortages amid declining domestic production and a growing reliance on imports. “We really only had six hours’ worth of gas left in storage as a buffer,” said Rob Hastings, director of energy and infrastructure at the Crown Estate, the property portfolio managed on behalf of the Queen. “If it had run any lower it would have meant . . . interruptions to supply.”

P.S.P.S. 06/19/2013, from Rune Likvern, based upon BP SR 2013:

The growing gap between consumption and production, UK imported fossil energy for an estimated US $ 35 - 40 Billion in 2012. I do not know of any other country that has experienced such a steep decline in energy production. From being a net energy exporter in 2003 to basing around 43% of its energy consumption on imports in 2012. UK’s energy production is now back to levels of late 60’s early 70’s.

Therefore, in nine years, UK has transitioned from a free market poster child that exports here and now whatever it has to offer, to a heavily indebted importer of crude oil, natural gas, and coal.  Let this be a  yet another warning for our darling manipulators of the media and public, and the incoherent, uneducated, and rushed reporters.