August 16, 2016 § 2 Comments

Mountain climbers know this well, especially when major peaks are the objective.  The base camp for the Everest climb (summit at 29000 feet) from the south side is at about 18000 feet.  The principal purpose is acclimatization: to the depleted oxygen, the terrain and the team.  The preparation is both mental and physical.  It is essential for success.  The Director (essentially the President) of the Indian Institute of Technology at Gandhi Nagar (IITGN) decided to institute a base camp for the entire entering class, based loosely on his previous successful venture at IIT Kanpur.  They refer to it as the Foundation Program.  The purposes are much the same as for assaulting difficult peaks.  I chanced to visit in early August, spoke to four students in the program, and here is my take.

First some background.  The Indian Institutes of Technology are elite engineering institutions.  The incoming students represent the top 2% of high schoolers, at least as determined by the entrance exam.  A presumption of academic preparedness is valid.  Why, then, a base camp?  In the US, some top economics departments have non-mandatory mathematics base camps for incoming PhD students.  This is intended to brush up on higher mathematics prior to diving into the program.  Most of the entering class has been out in the work force in some fashion, so this is likely targeting them.  The IITGN program is certainly not about academic preparedness in this classic sense.  My chat with the four students sheds some light.

Two young women (YW) and two young men (YM), unsurprisingly all evincing smarts.  What surprised was the self-awareness and the ability to express their feelings.  Not common for engineers, especially the latter facility; then, again, they were not yet engineers.  They had all been plucked out of the Foundation Program, with no notice (I asked for this within hours of the meeting) and presumably volunteered for it.  As it turned out, they all loved the Program.  So, relieving the tedium was not the reason.

Base camp with Mount Everest in background

I ended the conversation with a question along the following lines: “What was the one singular experience that was the most valuable take away?”  YW 1 said it was the sports.  Responsive to my query she stated that she had no opportunity or inclination in the past.  She was amazed she loved it, especially volleyball.  This from a petite frame topping 5 feet only in platforms.  American readers will ask what the big deal is.  The big deal is that, in my view, many of this cohort have immense pressure to do well in the entrance exam (don’t forget the two percenter population).  In some families it may be all consuming (not suggesting that is necessarily the case for this young woman).  This leaves little room for much else.  One function of the Program is clearly to provide this exposure to well roundedness; they really scored with this one.  YW 1 was up first, with no prep time for the question.  The response was prompt and decisive.  This was not a shallow impression.

YW 2 was up next.  She had discovered that she could speak in public, and that she was good at it and enjoyed it.  Some aspect of the program allowed this discovery; I did not probe the exact detail because it did not matter for what I was trying to achieve.  Hers was almost a sense of wonderment at this newfound capability, nay power (“I can dance!” Leo Sayer in Ten Tall Glasses).  This too was a big score for the Program.  Few traits are more correlated with success in engineering endeavors than the ability to communicate effectively.  Early discovery of one’s proclivity in this space could be decisive in choices even in the formal education.  An almost trivial example is volunteering to be the spokesperson in the reporting out of group projects.  YW 2 as well was firm and decisive.  You are getting a feel for my earlier statement regarding self-awareness and clarity of expression.

YM 1 could not have been more different.  His moment of discovery was the informal interaction with seniors (upper class persons) in a variety of settings giving him considerable exposure without the hazards of “ragging”.  Upon being asked, he expressed the value as being represented in advancing his own ambition to be the student body president.  I also got the impression that the socializing with the entering class played a part in what I described as developing a constituency, a characterization that he did not dispute.  I suspect Bill Clinton was similarly single-minded at that stage in his life.  The upper class participation appears to be a facet of peer to peer learning.

YM 2 enjoyed the collaborative atmosphere and the empowerment that went with it.  He described the formation of teams to create a variety of program elements such as logos.  Despite the highly competitive cohort, the interaction was very congenial and produced results.  Again, the time did not permit a lot of detail.  But one could safely assume that teamwork of this type would provide exposure to both unlike and like people.  My own IIT experience fifty years prior was more conventional.  As a result, my closer friends were either dormitory neighbors or members of extra-curricular activity.  Only one was from my engineering discipline, and he too was a neighbor.  I have observed the same with my sons in US colleges: lasting friends are from the freshman class and most usually from the same sources as mine had been.  This program allows for a broader and more informed selection.  This could be especially important for the young women, who are in a minority, only 10% in this class.

Derived solely from the feedback of these students, and deliberately without a study of the actual program, I conclude the following.  The IITGN Foundation Program is truly a base camp for the assault to come of what most consider the pinnacle of engineering learning.  These students will be better prepared than those at other IIT’s; of this I have little doubt.  Emulators need to consider the fact that this class size is small, about 180; some other IIT’s have 800.  The Program intrudes well into the school year.  This is feasible only in dedicated institutions, and even so, faculty will take considerable persuasion.  Could Everest be scaled without a base camp?  Most likely yes.  But, the probability of success with minimum damage is immensely greater with one.  All engineering institutes would be well served to study and emulate the IITGN innovation.  In Prof. Ross Bassett’s work MIT is credited with being highly influential in the formation and content of the IIT’s.  Their adoption of a version of this program would be fair turnabout.

Vikram Rao




May 17, 2016 § 2 Comments

The journal Nature recently had an entire section devoted to the Circular Economy. It is a concept that is gaining currency, largely through the efforts of the Ellen MacArthur Foundation. In brief, it stands for a society with a minimum of waste. The grand vision is to decouple economic growth from resource consumption. If this seems like a tall order, it is. But that does not mean we ought not to set such an aspirational goal.


circular economy schematic
When society is premised upon the continuum of take-make-use-refuse, then truly economic growth comes with the use of more resources. It begins with the resource in the ground, be it the metal for objects, gypsum for wall boards or petroleum for fuel or plastics. Energy, mostly derived from non-renewable fossil fuel, is used to make things. The produced goods are used, sometimes consumed and usually discarded as waste after the use.
The circular economy seeks to minimize waste at each of the steps. Manufacturing today discards up to 90% of the raw material. Certainly, additive manufacturing (3D printing) will help where it can. But the design step before that is just as important. Most anything can be designed for repair, refurbish and re-use in general, or not. This underlines a key tenet of the concept. It is very much not only about recycling. Recycling is often very energy inefficient, while it does conserve hard resources such as metals. Besides, recycling requires the step of aggregation, and this is often uneconomic.
The most successful model of recycling that I am aware of is that of lead from automotive batteries. The system made it happen. Folks were essentially given a discount on the new battery for returning the old one rather than discarding it. In states and provinces that do it, glass bottles have a deposit returned. One could argue whether the 5 cents drives behavior or not. But the principle is one worth emulating. A power drill returned for refurbish and subsequent sale, ought to have a value set on the return. But it would in the first place have been designed for economical refurbish. This underlines a key element of the circular economy: emphasis on repair, re-furbish and re-use in place of buying new. Expenditure on resources would be replaced with expenditure on labor. That means jobs.
Plastics ought to be an area of emphasis. The vast bulk of them are derived from natural gas or oil. The US discards 35 million tons per year and either recycles or combusts only 14.3%. They almost symbolize the use and discard concept and are the poster children for economic growth being proportional to resource consumption. An estimated 100 million tons of the stuff is floating around in the oceans. Part of the problem is the variety of plastic formulations used and not necessarily sorted. Only two, PET (polyethylene terephthalate) and high density polyethylene are routinely recycled. The research emphasis has been on recycling, although those attempting to reduce the energy to recycle arguably are playing to the circular economy tune (one startup in the Triangle area).
In the end it may not only be about technology. Business model change could drive behavior. If we went to more of a lease economy than buy and sell, the leasing entity would be advantaged by the equipment being maintainable and by it simply lasting longer. If they are also the manufacturers, they are positioned to design to achieve that result. Modern sensing and communication techniques would give them early warning for preventive maintenance. Similarly, sharing versus owning could play a part. The Airbnb model could be broadened to short term rentals of underused capital such as chain saws and party coolers (I know of a startup doing just that). Sophistication in data analytics, credit management and communications allows this sort of thing to be done cheaply. Who would have imagined five years ago that singers being paid $0.007 per Spotify play would seriously displace purchased (plastic) $20 CD’s? Most artists, other than Taylor Swift, seem to see it as a net positive.

I have written often that reasonable atmospheric carbon dioxide targets can only be achieved by simply using less energy for the same utility. The circular economy concept is certainly in that song book.
Vikram Rao


March 13, 2016 § 1 Comment

In most pursuits and especially baseball and personal relationships the concept of advancing from third to first would decidedly not be a good idea, and oxymoronic to boot. But there are settings in which this would be contrarian thinking at worst. The third here is not a base, it is a world. Sure, the more genteel term is developing countries. Transfer of technology has always been seen as a one way street, from the first world to the third.

08 Apr 2010, Algeria --- Traditional house with a solar panel in the Sahara Desert, Algeria, North Africa, Africa --- Image by © Michael Runkel/Robert Harding World Imagery/Corbis

08 Apr 2010, Algeria — Traditional house with a solar panel in the Sahara Desert, Algeria

When we seek to improve the lot of the over one billion with no electricity access, our tendency is to solve this in a first world way. This entails massive power plants in excess of a gigawatt with transmission lines everywhere, never mind the up to 40% losses on the way. This reminds me that folks who consider windmills to be visual pollution somehow do not have the same fervor in objecting to high tension lines cutting ugly swaths through forests.
Central plants inevitably are fueled by coal or natural gas, and more the former in the developing world. This in turn causes the west to complain that with all due diligence there, the developing world would progressively add to the carbon loading. Two distinct areas could avoid this trap of having to choose between lifting people out of poverty and climate change mitigation. One is distributed renewable power (with an assist from microgrids) and the other is energy efficiency.
The two most technologically and economically advanced renewable energy sources are wind and solar. Both of these are inherently distributed in nature. A single windmill of the most modern sort puts out about 1 megawatt. Even smaller units are feasible. An Alaskan village, and here we are talking first world, will need at the most a few of these. On price it is competing with diesel based power, with the diesel transported only once a year (due to short duration of water borne transport) at high cost. The ancillary benefit of fewer emissions are clearly a plus. An Indian or African village may well make do with just one, and smaller at that. A development to watch in this space is vertical axis turbines. They are much more bird friendly and eminently more deployable into interior areas than the large sails which have bridge clearance issues.
Solar is by far the best suited technology for the developing world, which by and large tends to be blessed with high incident radiation. Since solar power is generated in DC form, we would be advantaged if we stayed with DC all the way to usage. In a village setting the primary uses are lights, fans and cell phone chargers. With LED’s becoming more ubiquitous, all these devices can be DC operated. The good news is that fans running on DC are between 40 and 75% more efficient than those on AC. The same applies to compressors for refrigeration. The not so good news is that DC operated fans and compressors are not yet mass produced to get the cost down. LED’s are getting there and cell phone chargers are already there.

If somehow DC operated devices became the norm, the net effect on energy consumption would be highly material. A key enabler would be microgrids. In this situation this would be a DC grid. Edison famously lost that battle, and appropriately so for long distance transmission. But for a limited scope a DC grid would not suffer any material disadvantages. Importantly, conversion efficiency losses would be avoided. As it stands we convert the solar power from DC to AC, put it on the microgrid, deliver it to the homes and convert back to DC for use in LED’s and chargers. Each of the two steps has high single digit percentage losses, possibly more for older devices.
The notional thought is that villages ought to be powered using renewable sources and operate efficient devices. In time this could be the norm, thus reducing the need for large fossil fuel powered plants in developing nations. The ever improving economies of these countries will certainly add to the urban and industrial energy needs. The decarbonizing of these will need separate attention, although energy efficiency would also play here. While inevitably adding to the carbon burden of the earth, these nations could lead the way to a world that uses renewables effectively. The features of the settings of a pressing need and more expensive alternatives will allow widespread deployment. This in turn will bring costs down over time, especially of energy efficient devices such as DC fans and compressors. These advances would now be transferred to the first world, at first in isolated areas such as Alaskan villages and the Australian outback. This is the essence of the premise stated at the outset: advancing from third to first.
Vikram Rao


March 6, 2016 § 4 Comments

Meghan O’Sullivan delivered a fireside chat at the Sanford School at Duke on roughly this topic on March 3, 2016. She is on the faculty at the Kennedy School of Government at Harvard and is a former adviser to President George W Bush. Here I will report on some of her remarks but also put my personal spin and make a solid effort to distinguish between those. I have selected a few of her topics only, so this is not a comprehensive report by any means.


retrieved from

Dr. O’Sullivan believes that a significant US interest/presence in the Middle East is warranted despite the increasing self-sufficiency in oil. As we have discussed in these pages for a couple of years, this country will have all its oil sourced from North America (US, Canada, Mexico) by 2025, or even by 2020. We had been on a trajectory of adding a million barrels per day (bpd) each year since 2011. At that pace 2020 was realistic. Well, we are no longer on that pace, not for the last year. Mid last year we were at a record high and have since reportedly dropped by about 0.5 MM bpd, possibly a bit more recently. Two takeaways. One is that the upward trajectory is gone for now. The other is that it could resume in weeks after prices are acceptable. The first to go on stream will be the 5000 plus “fracklog” wells. Acceptability will depend on the operator’s breakeven cost per barrel. In pretty short order the weak will perish and the strong will buy their assets (independents and private equity only; I still don’t think this a play for the majors).
Sustained prices below $30 per barrel could deal a mortal blow to shale oil; unlikely but not impossible. Absent that the North America self-sufficiency scenario will play out. In that situation why would the US need the same armed forces footprint in the Middle East? Certainly we would no longer need the current naval presence designed to protect traffic in the Strait of Hormuz. O’Sullivan agreed with that premise and expected we would share the load with others, possibly even China. She noted the cooperation of others in dealing with piracy. Speaking of China, she opined that our shale related energy strength has engendered a new found respect for the US. She felt this improved our chances for cooperation, especially in the Middle East, where China cedes to us a better understanding of the locale.
One other point. Shale gas will not be wounded, much less mortally. Gas is a regional commodity. LNG globalizes it some but adds $4-6 per MM BTU, making the landed price anywhere in the world more than double the price in the US. This sustained low cost position of the US has caused over $160 billion of investments in US chemicals, more than half of that from foreign sources. These investments commenced in 2011. Expect demand to rise within three years when the plants are fully functional. This will firm up prices sufficiently to reinvigorate a currently moribund shale gas production scenario.
Dr. O’Sullivan was asked about the curious bi-lateral Doha agreement between Saudi Arabia and Russia on holding production to January levels. She noted that January was a high water point for both and suggested this was an effort by the Saudis to isolate Iran. Iran’s production from the sanction month of January was low. So this agreement could be a tactic by the Saudis to make Iran the problem for continued low prices. Saudi intransigence on production (instead of cutting to prop up price, increasing production to drive out higher cost competition) is widely viewed as the cause of the price crash. Fingering mortal foe Iran would help. However, any attempt to prop up price is bound to embolden US shale interests. That part of the industry is in an “innovate or perish” mode. Cost per barrel is dropping steadily, at first by service company cost reductions and efficiency improvements. The real gains will be in improving net recoveries, currently at an anemic 5% of the oil in place. This will happen, the question is timing with respect to survival.
There was some discussion of the effect of consistently low oil prices on the health of the economy and on citizens. Dr. O’Sullivan’s view that the positive effect on the US has been less than expected, is shared by other experts. The principal cause is believed to be that the public is saving rather than spending the bounty. One net importer appears to have managed the situation very well and that is India. Modi’s government has cut subsidies and raised taxes on fuels in step with the oil price drop. What the treasury does with the windfall will determine the true impact of the low oil prices.
Vikram Rao


January 27, 2016 § 1 Comment

With Electric vehicles are at in interesting inflection point. Car makers are finally getting serious about traversing the main hurdle: battery cost. When the Nissan Leaf first emerged, and for that matter also the Chevy Volt hybrid, lithium cells cost over $450 per kWh (kilowatt hour). As a rule of thumb, each mile driven uses 0.25 kWh. A hundred mile range will require 25 kWh in principle. But it is impractical to drain down to zero and a useful figure is likely 80 or 85%. In other words, 100 mile range likely needs a battery pack with about 30 kWh.
Many of us have posited the notion that cost had to drop below $200, preferably $150 for any sort of widespread use. At $150 per kWh, a 30 kWh battery would cost about $5500, accounting also for the ancillary costs for the pack beyond that of the cells. That is a reasonable fraction of a selling price of $25,000, a useful target for an economy 5 seating car. An all-electric car has no internal combustion engine, no transmission, possibly no differential (if 4 motors are used), all of which reduces cost. But a 100 mile range may not sell broadly (witness the muted enthusiasm for the current Nissan Leaf). At 200 miles, we are talking the battery pack costing $11,000. That probably takes the pre-rebate price up to $36,000. Is that too pricey for most?
A Prius type of hybrid has many of the good features of EV’s: regenerative braking, engine stops when stationary, electric drive for start and low speed, where IC engines are less efficient, to name the principal features. All of these combined will typically add 40% or so to the gas mileage in city driving. I mention city driving for two reasons: one is that it shows off the hybrids the most and two because the all-electrics such as the Leaf are impractical for distance driving at this time. These cost 2 to 4K more than the base model. 200 mile range all-electrics eventually ought to cost about 6K more (after realizing gains on lower cost mechanicals).
Tesla is making things interesting. Their luxury Model S is priced not much more than regular luxury models. The 60 kWh battery is about to be replaced with a 70 kWh pack. They flirted with a 40 kWh pack and it never really left the blocks because of perceived customer reaction. It shows in buying behavior as shown in the 2015 statistics for large luxury cars. It seems that the same luxury for about the same price with zero tailpipe emissions makes it an easy decision.

luxury car sales figures            Source:

The buying habits of this cohort may not comport with those of economy car buyers. So the $36K (before rebates) crossover may not have the same reaction. GM is betting on the forthcoming Bolt (great name by the way, reflective of the fast start possible with electric drive). Priced at $37,500, it will have 200 mile range (which, with a 60 kWh battery, is consistent with our computation above and so is believable) and seat 5. It will have plenty of pep: 200 HP (150 kW) and 206 foot pounds of torque. With the heavy batteries on the bottom of the cabin compartment, the center of gravity is in the middle and low. So in addition to being peppy it ought to handle well. GM can do this because they claim to be getting the batteries for $145 per kWh and much as Tesla has claimed, expect that to drop to $100 by 2020. These prices ought to translate to Nissan as well. So expect a bigger battery Leaf model.
Low gasoline prices, likely for a couple of years, affects some of the decisions. But it comes down to this: a hybrid five seat vehicle can deliver 45 mpg in the city. An all-electric will give about 105 to 110 mpg (computed on the basis of a gallon of gasoline containing 34 kWh of energy). It will cost more but maintenance will be much less, and so on. And there is the environmental benefit. Provided the big guns go forward with their intent the consumer will have choice.
Vikram Rao


December 30, 2015 § 2 Comments

Okay, so this one will be different.  Not even a passing reference to energy.  It is, however, in tune with the Christmas season.


The final performance of the narration of The Christmas Carol was a delight. Staged at St. Mathews Episcopal Church, in Hillsborough, NC, it was the last in a fourteen year series. Stars Allan Gurganus and Michael Malone, authors in their day jobs, pulled off an event far exceeding the expectations raised by the just praise received in the past. The church was packed. Victorian garbed usher Stephen Burke implored for cozier close quarters in the pews to accommodate the last few. The short and sweet carols were just right for the mood setting.
The best line was from Gurganus (Scrooge) when he said “Thank you” to the audience. They were properly appreciative of his funny and obviously extemporaneous line regarding ceasing intercourse with apparitions because of a resolve for abstinence or some such mildly salacious aside. It occurred to me that a Scrooge with a sense of humor may have even more depth to him. Consequently, outlined below is different take on the whole deal.
Being rich was not enough. Scrooge wished to be firmly implanted in the minds of folks for generations. He arrived at a strategy to cultivate an enduring image of miserliness and selfishness. This was hard because he really was a good humored sort as revealed by Mr. Gurganus in a weak moment. He had to suffer privation in diet and living conditions, gruel for dinner, minimal heat and so on. Personally I think he could merely have been mean to others and not to himself. But he was a perfectionist and who am I to judge what clearly worked. Then at the absolutely right time would come a miraculous reversal, exuding generosity and empathy. What a triumph! Brilliant, but needing flawless execution with no leaks to the press.
Performance evaluations the world over are centered on expectations. Typical ones read “meets expectation”, “exceeds expectation” and so on. The brilliance of the Scrooge Strategy, as it ought to aptly be named in the business schools, was to build years of expectation to the point where these were entrenched. These days we call it building a brand. The Coca Cola Company survived the incredibly disastrous New Coke adventure due to the strength of the brand. That would not have been nearly enough had they not brought back the old formula; naming it Classic Coke reminded folks as to why they liked the brand; brilliant ladder out of a deep hole.
The Strategy requires staying power. Ordinarily another member of the family could cause the resolve to waiver. Oftentimes this is the spouse. Scrooge’s strategic plan handled that pretty early on. His sweetheart (wonderful voice of Jane Holding in the reading) accuses him of worshiping the idol of gold and that relationship withers. Had she held on, it would have tarnished the relationship, and the idol for that matter, and quite possibly severely vitiated the grand plan.
The Scrooge Strategy has several key elements. One we have already noted: set up firm expectations. A second is timing. Christmas is a time when his parsimony and lack of good cheer would most be noticeable. This then was the perfect time to strike with a miraculous change of heart. But miracles are hard to come by, unless of course one is a saint or angling to be one. Even those guys are required only to have performed a single one; nobody expects continual production. In any case, a saint he was not, nor did he know any; his carefully developed brand would preclude moving in those circles. He was forced to rely on the occult. The public is inclined to believe in the persuasive powers of apparitions. A deft stroke was to have not one but three, allowing, nay inviting, but not claiming, the three wise men comparison.
The goal of the Strategy was to be memorialized for centuries, to be performed in Hillsborough 175 years later. Simply giving away lots of money will not get that done. Recently Mark Zuckerberg committed to give away 99% of his Facebook derived wealth. A reading in Hillsborough in the year 2290 commemorating the event, not likely. Besides you will note that the Strategy called for the gifting of a (admittedly very large) bird, a handful of banknotes, half a crown to the boy and a pay raise to the accountant that he had guiltily withheld for years in pursuit of the brand. The associated frailty of Tiny Tim had been a severe test, but one has to be resolute, else it falls apart. In these moments of self-doubt he would mutter to himself with a reassuring “It is a far, far better thing that I do”*. A bloke called Charlie Dickens overheard him once and asked if he could use it. “Whatever”, said the momentarily distracted Scrooge. In moments of reflection he sometimes went off script resulting in unintended generosity. Charlie never acknowledged him in his book so the brand remained untarnished by generosity no matter how fleeting.
The Hillsborough reading on December 18, 2015 was billed as the final performance of the amazing troupe. Please, sirs, we want some more*.

*Credits, respectively, to Mr. Sidney Carton (1859) and Master Oliver Twist (1846), as spoken through Mr. Charles Dickens.

Vikram Rao


December 14, 2015 § 1 Comment

Crude oil prices reached $36 per barrel this week. I had opined in a previous post in April that oil prices would fluctuate in a saw tooth pattern. Well, that has come to pass after a fashion, but not quite in the way I thought it would. First the facts, as shown in the figure below.

Oil prices to end 2015

There is an oscillation. But it is modest and not driven by the assumptions of my model. Those had been premised upon two key factors. One was that OPEC would cease to be deterministic on price and that normal supply and demand conditions would be in play. That has happened. My other view was that when prices dropped sufficiently, demand would pick up, and in turn drive more shale drilling. Months after that kicked in, the new production would dampen price and so on.

Two major macro events have conspired to vitiate the theory, at least for now. China is practically in a recession, at least as compared to their explosive growth of the previous decade. The consumption drop, both real and perceived, is limiting oil demand. India, while not in the same state per se, has simply not delivered on the growth promise of Prime Minister Modi. This is in part because his party does not control the upper house (sort of like the Senate in the US) and in part because his mandate is being severely tested by a huge loss by his party in the populous state of Bihar. Business friendly changes will be slow to come. On balance, the two countries expected to produce increased demand are not showing up.

The other factor has been the so-called Fracklog. This is the inventory of wells that have been drilled but not yet fractured. The impetus for this approach was in part that this differed about two thirds of the cost until prices improved. The other reason to do it this way is to perform like tasks, in this case drilling and casing of the wells, all together. This improves efficiency in the logistics of materials supply and the like. Offshore platforms routinely operate in this way and a variant is known as batch drilling wherein even the drilling portion is done in batches (a single well is not drilled from top to bottom and then the next).

In the case of shale oil the next step, the fracturing, simply has not occurred for a number of wells waiting for better prices. That count is believed to be around 5000 wells. It was a scant 1200 or so early in the year. Assuming initial production from each well in the vicinity of 500 barrels per day (bpd), the effect would be a potential 2.5 MM bpd if unleashed all at once. That is logistically impossible even though each well could begin producing within a week of equipment arriving. But even an additional couple of hundred thousand bpd would move the price needle down measurably. Possibly speculators are concerned that cash strapped owners will do just that at some point. This bearish thinking may be a factor in the price staying down.

Another curiosity as of today (December 14, 2015) is that WTI almost has price parity with Brent. This is unprecedented going back at least 4 years. The spread has been about 10% until recently. It all began when shale oil really took off in volume and export restrictions limited its market. The figure below shows the trends.



My hypothesis is that the speculators are assuming that the export restrictions will be lifted. There has been a lot of press on Congressional action being imminent. Mind you, the horse trading to achieve that legislation is of the type that often stalls near the finish line. Nevertheless that is the only argument that makes any sense of the spread disappearing.

At this point I feel that the saw tooth behavior is still likely but at lower numbers until true demand creation and some destruction of the fracklog. Some smaller oil companies will fail but the properties will be snapped up by the better heeled independents; the majors will not participate much in this. They in turn will eschew the ultra-high cost developments such as the Arctic, which is all to the good. Their forays to date have been unproductive and in my opinion the environmental risk is not worth the reward.

Vikram Rao