Are Oil and Natural Gas Cheap or Expensive?

Since fossil fuels are the essential commodity for modern civilization, reckoning their "cost" is critical.

Fossil fuels can be regarded as "cheap" or costly, depending on the context. How much energy does it require to extract and process the oil and gas, and then clean up the toxic mess created by the extraction, processing and transport?

Yes, hydrocarbons are toxic. Perhaps that should be the initial context of calculating the "cost" of fossil fuels.

Frequent contributor Gene M. submitted this important article from Counterpunch.com: The Inflated Promise of Natural Gas.

It turns out the "happy story" presented in the mainstream media/propaganda stories listed here yesterday left out all the toxic bits of the "abundant cheap natural gas" bonanza. Here's a taste of what was not covered in the MSM:

Meanwhile, major fracturing-fluid manufacturers refuse to reveal their products’ ingredients. (Industry leader Halliburton maintains that to compel it to list the chemicals in its products would be an “unconstitutional taking” of its intellectual property.) Investigators have managed to identify many of compounds used in fluids, and many are toxic. Some, including benzene, formaldehyde, 1,4-dioxane, ethylene dioxide and nickel sulfate, are confirmed carcinogens.

The "happy story" is that the wells are miles deep and thus beyond ground water. But much of the water and chemicals pumped down a mile is returned to the surface and must be dealt with as industrial waste. So much for being "cheap."

Correspondent Daniel D. checked in with this eye-opening account:

Just read your post about oil and frac technology and thought I'd chime in with my two cents. In summer 2008 I was a student working for a woman in a McMansion neighborhood in the Dallas/Ft. Worth area. Ft. Worth (and much of Texas) is under the influence of natural gas co's who have recently developed a technique for drilling beneath urban areas. (We mounted a campaign to stop them from putting a well on the neighborhood's golf course and in the course of events discovered evidence indicating that some of the Homeowners' Association board members were probably on the take... But that's another story)

Back to your post: This stuff is anything but cheap OR safe. They have to buy mineral rights from every land-owner in an urban area or pay residents royalties -- not the same as dropping a pipe in a supergiant Saudi reserve. Neighborhoods caught on and learned that if they cooperated they could jack up their prices.

And the environmental damage is severe -- Parker County's water comes out of the tap ready to burn... videos on Youtube show news stories where the anchor lights a glass of tapwater on fire. As for the fraccing chemicals, they are conveniently labeled "proprietary" and so do not need to be disclosed to authorities. This stuff is not the way for us to go in the future, just an unnecessary extension of our energy past ...

Thank you, Gene and Daniel. The entire "natural gas is abundant, cheap and clean" story which is being hyped and propagated by the MSM is the purest propaganda, as it leaves out all the practical obstacles and the punishing costs of dealing with the toxins pumped out with the gas.

Just in straight money terms, let's extend our inquiry into the cost of oil by pricing it in non-U.S. dollar contexts: euros and gold. Frequent contributor B.C. generously provided this chart of oil priced in euros, adjusted for consumer price fluctuations (year 2000=100), plotted against the GDP of the Eurozone:

click on chart for a larger version in a new browser window

Strikingly, even when priced in euros, oil is rising in cost even as the Eurozone GDP languishes at recessionary levels. Many commentators believe that spikes in the cost of oil are the defining factors which trigger recessions. If this has any merit, we might ponder what effect the sharp rise in oil prices even in euros portends for the global economy.

I asked frequent contributor Harun I. for a chart of the oil/gold ratio, and he graciously submitted this chart:

click on chart for a larger version in a new browser window

Oil priced in dollars is in black, and the gold/oil ratio is in red. Many analysts state this ratio in terms of "one ounce of gold buys X barrels of oil."

When gold was around $300 an ounce and oil was about $15/barrel in the late 1990s, then one ounce of gold bought 20 barrels of oil. When oil spiked to $147/barrel and gold was approximately $900/oz, then one ounce of gold bought a mere 6 barrels of oil.

Now that gold is $1,090/oz and oil is about $80/barrel, then one ounce of gold buys about 13.5 barrels of oil--not much more than when oil was "cheap" in the 1990s.

In other words: as all currencies depreciate against gold, then the cost of oil priced in those currencies rises even as it remains constant when priced in gold. But like all commodities, gold and oil fluctuate in relative value as well.

So are oil and natural gas "cheap" or "expensive"? That depends on what they're priced in and who's paying the hidden costs of the vast industry which extracts, processes and transports these fossil fuels.

Lastly, we might place the value of gas and oil in this context: how much will we be willing to pay if and when they become scarce?

Comments

[H. T. Love:]

Ever since Boone started his campaign, I was convinced that the NG story as a "bridge", in certain scenarios, made sense. Then SA participant "One Eye" made me aware of the pollution issues.

As I have learned more, only one thought keeps surfacing: why in the hell are the folks that are in the NG E&P area pursuing the same old obfuscate and delay policies in addressing the issues rather than jumping on board with an attitude of "let's work together to solve the problems".

Certainly we have the intellect, technology and wherewithal to address and fix the problems up front, rather than following the same old route. And if they can't be fixed, then certainly the efforts to expand NG production via the current "fraccing" methodologies should be terminated.

Even those in the industry have to live on the planet.

The argument about the "fraccing" being well below the water tables seems rather thin in that we all know that the geologic formations are not static and change over time. This poses the risk that the toxins left in the ground could enter the water supply in the future.

The processing of the water returned to the surface seems less of a problem as cleaning, disposal and re-cycling technologies already exist (and will likely improve in the future).

My other major concern in that area is the copious amount of water used in the process. Fresh and safe inland water supplies are already under duress in the U.S. Some way must be found to ensure that the water used is returned to the system, in potable quality, with minimal net loss to the system.

I'm afraid that unfortunately that we will follow the same old "confront and conflate" policies that we have followed in the past.

I'm not concerned so much with the reduced savings in CO2 emissions. *If* CO2 is really a problem, any gain from the high single-digit percentages upward seems a significant benefit.

Are there better strategies to wean ourselves from energy dependency? Probably. Unfortunately, with policies being determined by lobbying budgets, rather than technical and economic fundamentals, we are not likely to pursue them until significant damage of various types has been done.

HardToLove

Nov 06 06:10 AM

[Freya:]

The Devil is in the Details.

I'm more concerned about the Water/Food problem than the Air problem.

I consider the one slope to be slipperier than the other.

CO2 is not a problem now, it may cause the melting of xyz and flood out hundreds of millions...Gore was on Charlie Rose last night...450 Million to be exact.

What happens to them? How about the Millions of acres being shed of Ice. The Relocation would be daunting but it would provide jobs for hundreds of millions for decades.Virgin lands, continents worth. Turn the deserts green, Tow the big slabs of ice to giant manmade lakes.

You can really lell, I'm into Science Fiction.

Nov 06 06:46 AM

[apppro:]

So is it expensive or cheap? I really can't gleem your answer.

What I do read into it is that if NG is SO expensive to process, not as clean and plentiful as thought, and SO hard to get to, then why the heck is it trading SO cheap?

Nov 06 08:11 AM

[tripleblack:]

NG is one of only 3 sources of energy that have the extensive existing infrastructure to make a difference short and medium-term.

Oil is the obvious first cut, and we all know that we have been feverishly building the oil infrastructure for a century, and we will NOT be alble to replace it short term or even medium-term, though of course once a direction is identified (yet to happen) it would be nice to at least START.

Electricity is the next cut, and again, we have been building up that infrastructure for the past century as well... But since virtually ALL the ideas competing with the Oil infrastructure assume switching that load over to the electrical grid, what we have is grossly insufficient. Once again, we run into the short-medium term problem.

That leaves the NG infrastructure, which is even older in many ways than the other two, but smaller and even less flexible... BUT it is a pre-existing infrastructure, something which can be augmented just as the electricity grid can be augmented - and with technology which is much quicker and easier to use to displace oil than electricity (particularly for transportation).

As HTL points out, the problem is one of leadership and will - or more accurately, the lack thereof.

NONE of the available paths is cheap or easy, but the current chaos is surely the costliest and hardest way to go.

NG is no panacea, but it is already part of the national infrastructure, and its role could be critical (as Mssrs Pickens and HTL point out) as a bridge technology to fill in the yawning gap we have created through prior decades of stupidity and vacillation.

As for Global Warming, and whether we are going to stay in this Interglacial Warming Period or drop back into the ice box, and specifically whether Man is in the driver's seat, well, THAT is a debate that needs to be detached from the National Energy Policy (if we actually had one, of course) until a thorough and truly objective review is performed IN HOUSE (not, to put a point on it, in the UN or elsewhere).

Nov 06 08:36 AM

[yellowhoard:]

Color me cynical.

The international oil cartels have done a splendid job over the last 40 years of making it impossible to develop alternate sources of energy.


Nuclear is dangerous.
OK nuclear isn't dangerous, but we've got no place to store it.
OK we've got a place to store it, so we'll shut it down.
Damn, we've got no place to store it.
Hydroelectric causes certain minnows to have difficulty finding their breeding grounds.
Damned lakes are horrible monsters.
Coal is dirty, dirty, dirty.

I grew up around coal mines, strip and shaft, and whenever Peabody was finished with a mine, they planted trees and ten years later, you never knew they were there. In fact, the fishing was fantastic. And, call me Pollyanna, the air has always been fresh and the sky blue where I live.

It seems to me that, if you follow the money, the global oil concerns have a big BIG interest in seeing all alternatives shot down.

Solar cells and windmill power are a joke. We don't have enough rare earths to make em. And, if we did, we'd have to cover every square inch of the country with them to make a dent in what we currently consume from hydrocarbons.

Don't even get me started on the economic stupidity and moral bankruptcy of turning corn into ethanol.

In the mean time, the powers that be are doing everything possible to retard resource development in the US. Anyone notice how nothing became of offshore drilling after the energy spike last summer?

This is a HUGE deal. America is on the doorstep of an energy crises that will turn us into slaves dependent on the rest of the world for our future livelihood.

Maybe you guys are right about ground water and NG. But, NG is our only hope to decouple from the scumbag global oils that are determined to enslave us at the gas pump. Setting up a trust to potentially clean up tap water in Texas seems like a pretty prudent alternative to stopping this technology right now.

But, don't worry, I'm sure someone will make a movie about some toddler that dies of cancer. The trial lawyers will take it from their.

Nov 06 08:49 AM

[Mad Hedge F...:]

xgi If you think oil is expensive here at $80, look again. The Department Energy chart below of US oil consumption per unit of output shows that, in fact, we are at a 40 year low in the price of crude. In other words, it takes half as much oil to produce a unit of GDP than it did in the late sixties, when 12 miles per gallon was considered reasonable, and only Lincoln Continentals got abused because they consumed a gluttonous six miles per gallon. This is the why current lofty prices are having a negligeable effect on a reviving economy. The other chart shows the price of oil in inflation adjusted terms. Again, we are at the high end of the range, but nowhere near the top. What’s the lesson in all of this? If the price of oil is not hurting now, then it will move a lot higher to where it does hurt big time. When the US gets back on track, and the emerging markets return to firing on all 12 cylinders, triple digit oil is a gimme, and new highs will easily be attainable. Then you can expect the current perfect correlation between rising stock and crude prices to shatter. Make sure you maintain exposure to the oil patch, either through majors like Chevron (CVX) (click here ), oil service companies like XTO Energy (XTO) (click here ), the Russian market ETF (RSX) (click here), or just the plain vanilla Oil Trust ETF (USO). If noting else, these names will help immunize your portfolio against the certainty of higher fuel prices. If you are wondering where the “W” recession might come from, this is it.

Nov 06 09:41 AM

[Ferdinand E...:]

This is an interesting article, and the comments are even more interesting. I don't remember how many decades (or centuries) ago an American business executive in Vienna told me that I didn't have a clue about shale oil, but I listened to him and how I'm hip on that subject. It's possible - though not certain - that there is a bad misunderstanding about shale gas. As for why there might be a misunderstanding, well, you know that as well as I do. MONEY. I hope though that the US has the gas people keep talking about, because together with the coal in that country, the US would be sitting pretty where resources are concerned - which means that in the long run most of the rest of the world COULD be better off. As the author said, large amounts of fossil fuels are essential - at least for the near future.

Nov 06 09:43 AM

[dwprice:]

I think this is the worst article I have read in my year on this site. Your "correspondant" is full of sh--. Since when are emailed anecdotes something you base an article on, lol? Does this pass for real reporting? What scientific method was used to determine that ng drilling causes his water to be flammable? Please provide documentation.

There are no proven instances of water well contamination from barnett shale drilling. Your correspondant makes this sound like a third world country, with people on the take, and water poisoning on a massive scale. Do you think the city of Fort Worth, the 8 county barnett area, much less the state of Texas, would tolerate ground water contamination from gas wells? Please, this sounds like the rantings of a conspiracy nut.

The natural gas business has been a boon to north Texas, as well as many other states. Ask the good people of Pennsylvania, Louisiana, Arkansas, and others, whose tax base as well as individual income from royalties is shooting up. While not perfect, it provides jobs and a clean reliable source of energy.

By the way, I live in Parker County with my wife and two small children, there are 3 barnett shale gas wells within 400 yards of my house. My water comes out of my well clean and tasty.

Drill baby drill!!

Nov 06 10:24 AM

[ripskii:]

All our energy options nave associated problems that require solutions. Instead of whining about their difficulty we would be better rewarded by solving them. For example there is little doubt that we require more and better nuclear power along with wind, solar, geothermal, and NG.. The IFR reactor concept greatly improves efficiency, is inherently safe, consumes light water reactor waste (eliminating the need for Yucca Mountain) and converts very long half life material to only a few hundred years. Unfortunately this advanced program at the Argonne Lab was shut down more than a decade ago. It is way past time to not only address our short term bridge energy solutions like NG, but to plan for what is on the other end of that bridge!

www.sustainablenuclear...

Nov 06 10:41 AM

[John Galt:]

I want to know what the Prius driving eco people want to use?

Oil = no good
Natural Gas = no good
Nuke power = no good
Hydrocarbons = no good

Please, saying " Solar & Wind" isn't a viable answer. Plus wind disrupts birds migration and that would be bad for mother nature. So please tell me what the correct energy policy is.

Nov 06 02:28 PM

[JeffDB:]

A few random thoughts.

1. I think the cost of oil can certainly have a major impact on an economy. I don't have a link, but there is a high correlation between having price spikes of any duration and a recession following shortly thereafter. That shouldn't be too surprising given that it sucks an awful lot of money out of an economy.

According to the EIA tonto.eia.doe.gov/dnav... we imported some 12,915,000 barrels of oil per day in 2008, down a little from the peak in 2005 undoubtedly due to the steep price rises we had experienced. But if we were paying $25 per barrel more for the oil than previously that would have added an additional $322,875,000 to the amount of dollars leaving the country every day, or $117,849,375,000 per year. That's sucking money out of the consumers' pockets and sending it to Canada, Venezuala, Saudi Arabia or wherever and it has to have a significant effect.

2. It doesn't surprise me that the cost of fossil fuels is going up even in inflation adjusted terms. It is a finite resource and we've been consuming it at an ever increasing pace for many decades. According to the EIA tonto.eia.doe.gov/ener... worldwide consumption was 85,534,000 barrels/day in 2008. A lot of the old wells have become unproductive and shut down, and the new ones are much more energy intensive and expensive to produce. The old "gushers" at the surface are apparently a thing of the past. The new wells are often miles beneath the ocean surface, in arctic regions or are "unconventional" like oil shale and tar sands. The "energy return on energy invested" used to be some 100:1 but steadily dropped to 11:1 a few years ago I believe, and is probably below that now.

3. How "cheap" it is is somewhat subjective. Comparing current prices to historical prices I think we would have to say it is definitely expensive even on an inflation adjusted basis.

On the other hand, I've seen the cost of gas compared with the cost of many other liquids and it has come out cheaper in most instances, including even some bottled waters. Here's one such list: www.cockeyed.com/scien...

Of course, we don't consume those other liquids, other than water, in the quantities we use petroleum products.

Matthew Simmons brings another perspective. www.simmonsco-intl.com...

He thinks it is still very cheap from the perspective of what it will do for us. The bang for the buck, if you will. I don't remember the numbers he uses, but it's along the lines of a pint of gasoline will propel you and a 2 ton vehicle X amount of miles.

I think he's right in that regard. The reason we get upset about high prices is because we *need* the fuel and there are currently no real legitimate substitutes for it, at least in the quantities of energy we are used to using.

Prices would have to get far higher before many would consider riding a bike 25 miles to work. Probably higher yet before it would become economically viable to dig basements by hand or try to use levers and pulleys to erect skyscrapers by hand.

Nov 07 01:54 AM

[pockyclips ...:]

As long as big oil and nuclear is subsidized more than all others, you simply can't make an informed decision. Half our military is used to either defend the oil fields, or the trade routes back to the US. Why aren't these costs entered into the equation. It's at least $1.50/gal.

Nuclear sounds better for the CO2 crowd, but 90% comes from Russia and it's former republic, Kazakhstan. Do we really want to end up kissing Bear A** like we do the Arabs?

It still baffles me that we realized long ago that we had to have renewable food supplies, and get off the hunter/gatherer bandwagon. Why can't we do the same for energy? After all, all energy is solar when you look at it in the grand scheme.

Nov 08 08:47 AM

[JeffDB:]

On Nov 08 08:47 AM pockyclips 2020 wrote:

> Nuclear sounds better for the CO2 crowd, but 90% comes from Russia and it's former republic, Kazakhstan. Do we really want to end up kissing Bear A** like we do the Arabs? >

But I think that problem may have already been solved. Some of the newer generation reactors use different, more abundant fuels such as thorium.

Felix Salmon had an article on here a little while back about a 4th generation reactor that can run practically "forever" on the spent fuel from prior reactors, essentially eliminating the problem of storage for that spent fuel.

It's also apparently an exceptionally cheap way to get power.

seekingalpha.com/artic...

"And best of all they’re eminently affordable: Loewen showed that they could be profitable selling energy at just 5 cents per KwH — which means that you don’t need to price carbon emissions at all to make these power stations economically attractive. With pricing on carbon emissions, of course, they become even economically compelling."

Nov 08 10:18 AM

[mountain view:]

The word you are looking for is "glean."


On Nov 06 08:11 AM apppro wrote:

> So is it expensive or cheap? I really can't gleem your answer.<br/>
>
> What I do read into it is that if NG is SO expensive to process,
> not as clean and plentiful as thought, and SO hard to get to, then
> why the heck is it trading SO cheap?

Nov 08 05:19 PM

[bobbobwhite:]

When discussing the use of NG in all of its forms, to be fair one must speak of any "toxins" emitted from its usage only in comparison with those in other carbon energy forms. Those NG toxins so derided here are not only emitted from the burning of NG but from any carbon-based fuel, and are significantly lower in NG than in oil and coal.

Try to be fact-based and fair in your arguments, or are you being paid not to be? Like it or not, NG will be the bridge fuel from oil to green, and will finally get us away from foreign oil dependency. That alone is reason enough to use it until it too is gone.

Nov 09 11:37 AM

[Alamo:]

For the foreseeable future NG is the only viable energy source that is 1) available , 2) American and 3) relatively environmentally friendly.

Nuclear, geothermal, solar, wind, etc all have their problems (as does NG) but for our immediate needs, it poses the best solution. As soon as congress gets unbridled from the healthcare empasse and passes HR 1835 and the companion bill in the senate, S. 1408, it seems certain that President Obama will sign it into law. At that time, the transition to CNG primarily in the transportation sector, figures to take off.

Cap and trade legislation increases the environmental advantage NG has over coal in the power generating industry where it currently produces about 20 per cent of our electricity.

NG has an enormous advantage over crude oil due to its being an American domestic resource rather than a foreign commodity subject to an OPEC-controlled world market, so it doesn't have that built in $1.50 to $2.00 a gallon national security surcharge attached to it. As a transportation fuel it beats crude oil derived gasoline and diesel in every way measureable. Simply, its a vastly superior transportation fuel.

Waging a war, keeping the Straits of Hormuz open and pirates off those super tankers has its price---a very high price.

Nov 09 02:33 PM

[geob:]

Please read USEPA regs on exempt/nonexempt oil field wastes. I went through this issue repeatedly with Industry when employed as BLM geologist/haz mat coordinator in early 90's. "Flaming" drinking water is not a recent issue, usually explained away as a bad cement job or natural fracturing up/downhole.

www.epa.gov/osw/nonhaz....

Nov 10 07:28 AM

[apppro:]

my bad.


On Nov 08 05:19 PM mountain view wrote:

> The word you are looking for is "glean."

Nov 10 08:15 PM

[JD1A:]

Strictly from an investment perspective NG is by far the long term investment with funds like UNG trading at close to $9, a year from now you will al be looking at a lost opportunity if you don't buy now. Think about NG was 3X's the price in the last 2 years. What goes down and has a limited supply must go up. I am buying UNG. This is truly from an investment only perspective.

Nov 13 11:51 AM