Russ: Welcome back to The BusinessMakers show, brought to you by Comcast Business, built for business. And welcome to Digital Leader Series number five. This is our quarterly event where we’re in front of a live audience of digital leaders (applause), where we go to great lengths to bring in interesting technology oriented guests, and I’m very pleased that my guest today is Mark Mills, a Manhattan Institute senior fellow and physicist; CEO of Digital Power Group; sought after speaker and writer for Forbes, focused on the intersection of energy and technology, ranging from electric and autonomous cars to 3D printing and robotics to data centers in the future of oil and gas and Shale 2.0. Mark, welcome to The BusinessMakers show.
Mark: Thanks for having me, Russ.
Russ: You bet. So let’s start here at that intersection of technology and energy. You know, there’s a lot of people on the East coast and the West coast that don’t acknowledge that technology plays a role at all (
Mark: there’s a few in the middle, too) in the future of oil. There’s a few in the middle, too? Absolutely. Share your perspective on that intersection today.
Mark: My whole life I’ve spent, what I would call intersection because it is a simple fact, so when I state it it’s sort of obvious, but people forget this and it’s the right way to start the analysis of the future and the present of energy. It’s always about technology. It’s not about resources, per say. It is, of course, about what governments will let you do or stop you from doing, but fundamentally, everything about how much energy we can get is about the technology we have, and that’s always been the case; it’s been the case for millennia. It doesn’t matter whether it’s shale fields or solar panels; technology is what determines how much energy we can get, at what price, and what level of reliability. It’s also the case that technology determines how we use energy and how much we use. It doesn’t really matter what we’re talking about society; from growing food, to growing silicon chips, to operating cars and airplanes, to operating computers.
In fact, one of the kind of factoids I point out to my colleague, and the folks at Apple weren’t real happy when I said this, but a typical user of an iPhone, for example; the average user, which wouldn’t be the people in this room, but the average user. The average user (
Russ: They’re way above), they’re way above average. The total amount of electricity used in the ecosystem that allows you to use an iPhone is roughly equal to the electricity used by your refrigerator in your house. Put another way, since we’re in a sports bar, the amount of energy needed for you to watch a major league game on an iPhone or iPad, if you watch the whole game, you’ll use more energy doing that in the ecosystem than driving 20 miles in a Prius to the game. Everything requires energy, and the—everything is technology. It’s always about technology. So, this has always been my interest in energy, and it’s, in my view, relevant to figuring out the future, more than the present.
Obviously the present matters, but if you want to know where the energy world is going, whether its demand or supply, you have to understand where technology is going.
Russ: Well, and didn’t technology play an extraordinary role in the discovery, exploration and development of this incredible success story that really emanated from Houston, TX in the shale oil and gas production?
Mark: Well, of course. It’s entirely a technology story and an entrepreneur story; entrepreneurs using technology and, of course, famously known, especially here, George Mitchell’s pioneering role using the technologies. And the technologies have been advanced in it, and refined, and improved by whole hosts of other companies since then, but it’s technology. The shale fields have been mapped out for over a century by geologists; we knew the shale was there. Geophysicists called it source rock for a reason; source rock means that’s the source of the oil and gas, where the hydrocarbons reside. In physical terms, we’re talking not thousands of barrels of oil and oil equivalent, but trillions of barrels of the physical resource that exists. It’s a phenomenal amount of energy, only unlocked by, as you know, technology.
Russ: Absolutely. Okay, so it’s kind of interesting being here today with you, too, in sort of the energy capital of the world. There’s all of these adverse organizations, and missions, and initiatives out there championing the cause of battery operated cars, or even Uber. Even the concept, only about probably two months ago, there was this news story that millennials are not going to buy cars, which I think it was like four people in San Francisco said, we’re not going to buy a car. You don’t need a car out there or in New York. So, should oil and gas companies, should energy companies be concerned with that? You even have this term now, peak demand (
Mark: Right). We used to have peak oil and now they’re saying peak demand, meaning demand is just going to be gone.
Mark: What happened is that the anti-oil cabal; there’s a group of people in the world who don’t like oil and gas (
Russ: Right). They think we shouldn’t use it and it’s not a nice thing and they think that the industries around that are uniquely different than industries around every other thing we build in the world, which is a little silly as a premise, but they have given up on peak oil because the world, as everyone has noticed, is awash in oil. In fact, for better or for worse, from the viewpoint of oil producers, I think we’re now, for all practical purposes, in a permanent state of cyclical oil gluts, because of what technology can do here and around the world, but particularly here because of the shale fields. So what do you do when peak oil failed as a theory? Well, you promulgate the theory and peak demand. And the idea is real simple, right? It’s, as you say, the hipsters, the millennials, don’t use cars anymore because they’re too cool.
They ride bikes, they Uber—they use Uber to share, and they’re going to, you know, just take mass transit. Well, it turns out that that particular idea, that millennials aren’t going to drive cars, was an artifact of something that we’re all familiar with called a recession; they didn’t have any money. We already know, the data have already shown, now that the economy is getting a little better, we’re still bumping up out of it, we’re getting better; millennials have money again. What are they doing? Well, shock, they are buying cars. Not only are they buying cars, road miles are going back up again, average miles per capita. Gasoline use now is about to go past its previous pre-recession peak, and when you take surveys and ask millennials what kind of car they’re going to buy, it’s kind of interesting.
Ford just did a survey in Europe looking at European millennials, now keep in mind (
Russ: they’re a special category)—yeah they special, I mean this is the land of the clean and the home of the green; they love green cars. The majority of them, more of them are planning to buy SUVs than boomers did (
Russ: Wow. (laughter)), and they’re not going to be electric, they’re going to be gasoline powered for very practical reasons with respect to performance, and safety. In fact, we already know how the voters think about the two classes of vehicles: electric vehicle sales are down 20% this year; SUV sales are up 15%, and this is just the beginning of the next cycle in car buying.
Russ: Okay, but I know a lot of people that have Teslas, that have driven Teslas, and then say this is the car of the future. I mean, and if that happened, of course, you know something had to charge the batteries, but should we worry about that?
Mark: Well, the short answer is no. I mean, if you’re an oil producer, you have nothing to worry about with respect to Tesla. Tesla’s a fine car, in fact, a spectacular car. I mean it has, you know, lip-tearing acceleration because it’s got enormous amount of horsepower in the (
Russ: Lip-tearing?)– lip-tearing; your lips get pulled back from the G-forces. Pavement rippling acceleration, how about that? (
Russ: All right) The problem is that, outside from the fact that it’s an expensive car, there’s a very basic piece of electrochemistry, and I hate to sort of do a little physics 101 on an interview, but let’s just do a piece of reality because it’s important here. Everything about a car is the same, whether it’s electric or gasoline powered, almost everything; the wheels, the tires, the seats, the frame, the windshield, they’re all the same, they all weigh the same.
The only thing that’s different between the electric car and the gasoline powered car is the weight of the fuel. The weight of the fuel is sort of the principal determinant, and the cost of the fuel, of how a car performs, ultimately. So the weight of the fuel that you have with a battery powered car, you can go half a mile per pound of fuel. With a gasoline powered car, the average one today, you can go six miles per pound of fuel. Now, batteries will get better; Elon Musk promises it as do many other people. Maybe they get twice as good. There’s no electrochemistry to get them more than three times better than they are today. So, let’s just say it gets four times better, and you go two miles per pound of fuel. You can buy today, internal combustion engines that are three times more efficient than the average, which is twenty miles per pound of fuel.
This huge difference in performance of the basic electrochemistry of oil vs. batteries means that most cars, for most of the future, will be oil powered, and airplanes will never be battery powered.
Russ: Okay, why don’t oil and gas companies make this kind of information known?
Mark: Well, you know, it’s funny, the trope in the green community is that the oil and gas industry is buying advertising and putting out this information about energy. The last I checked, every oil and gas company that I’m familiar with, other than giving money to their trade associations to lobby in Washington, has no information campaign of any kind to promote the benefits of the product that they produce. In a sense, they don’t have to, because this is a case where the differences in the inherent physics of the energy of oil vs. everything else is so overwhelmingly better, and the inherent economics are so overwhelmingly better, that markets will use more oil. We’re going to use a lot more oil in the future, simply because there is no replacement. In fact, I’ll go one step beyond that. If we wanted to imagine a new future, if oil didn’t exist, we would invent it.
Russ: You know, when you talk about it in the market and driving it, but don’t those guys, somehow or another, have so much influence in politics and the present administration that we have these huge subsidies. I mean, every time Elon Musk, you know, sells a car, the government gives the car buyer how much, four or five thousand dollars?
Mark: Closer to ten or fifteen thousand dollars. So, it’s a pretty big subsidy, going to the wealthy, because the wealthy are buying the hundred thousand dollar, sort of Maserati priced cars, and that’s not sustainable. It’s not sustainable to scale. The theory was: we subsidize in the industry to bring it along its scale, and it’s scale, and will get cheaper and more people will have it. That’s not what’s really happening. What’s really happening is that all cars are getting better, and oil powered cars are getting better faster. The idea that somehow the physics and the chemistry of batteries are going to profoundly change through throwing money at it is, one would use an impolite word, I’ll just say it’s silly. Oil and gas powered vehicles are getting better, and they’re getting better faster because the inherent energy density is so much higher. You have fifty times more energy per pound of fuel in oil than you do per pound of battery, to begin with.
Batteries are not going to get fifty times better, there’s nothing in the physics that permits it.
Russ: Okay, cool. So, you got on my radar because you’re going to be the keynote speaker At The Crossroads of Austin, I believe, in November. The show, The EnergyMakers Show is a fan and goes to that event all the time. And you’re a keynote speaker because, mainly, you got on their radar because you wrote this article called, “Shale 2.0,” and this is really fascinating, I think, in this energy market to see the pain that we suffer with the decline all the time in the price of a barrel of oil. Share a general overview of your “Shale 2.0” publication.
Mark: Sure. Well, it starts with this observation that everybody in Houston knows, and everybody in the oil and gas business knows; the shale business is new. It’s a very new industry. A decade ago, it was essentially a non-existent industry. In about a decade, it’s gone from non-existent to an infrastructure investment from the private sector that’s starting to approach one trillion dollars. It’s not government money, it’s not taxpayer’s subsidized money, it’s not federal grants, they’re not special programs. No one asked for this. The whole industry came into being because of the economic opportunity to extract so much oil through hydraulic fracturing its shales. So, we all know this, and it generated an incredible boom in activity; not just in hardware installation, but in knowledge and skills.
And, like any new industry, you get a refinement of the talent, you get a refinement of the hardware, you get a refinement of the ecosystem, you get improvements in who the players are and how they operate. And you get a very fast learning curve, but it’s still a new industry, so there’s a tremendous variability in the skill sets in the industry or the performance of different companies, which you find out when the price drops. It’s kind of like the Warren Buffett line; remember what he said about performance of certain companies. It’s kind of like, when the tide goes out you find out who is not wearing bathing trunks (
Russ: Right). The tide has gone out on oil prices and we know whose, you know, but these kinds of dynamics are standard in industries, of all industries. When they’re new, they grow rapidly, we refine our skill sets, and in that transformation when there’s overcapacity, overbuilding, or price collapse, which is what happened, that doesn’t signal the end.
That’s actually the beginning of the new industry, where it’s just starting out. It doesn’t make it easy for the players looking for higher prices, but the fact is, everyone is ‘high-grading,’ let’s say. They’re doing their best talents, best geology, best geophysics, the best instruments, the best tools, the best in analytics, so that’s normal. So, “Shale 2.0” starts in sort of the crucible of the price collapse; in normal times, for this characteristic of an industrial growth. But this one also happens at a time in which is totally unique in the history of the United States; in fact, the history of the world. It’s happening contemporaneous with the data, analytics, and automation revolution. We now have at our disposal something that was never available before general to industries in general, which are robotics and automation tools, which are now practical and have not been widely deployed.
We have analytics capabilities with massive amounts of data that have been gathered in the shale fields; they’re not mined yet. What it means is that over time, and very short time, we’re talking not weeks, but certainly only years, we can begin to data mine and ‘high-grade’ our knowledge into analytics and algorithms; sets that the average guy of the future is better than the best guy today. Well, I can put that in dollar terms: the best guy today in the Permian is maki– could make money at $15 a barrel. (
Russ: Fifteen?) Fifteen. The best guy. The best as far as shale field and the best wells. That’s not the average. But with technology and analytics, the future average migrates to today is best. This is a tectonic shift in the global oil industry and the domestic industry. I think this happens, I think that’s what shale 2.0 is. I think we’re roughly at the state of shale 2.0 as we were with shale 1.0, sort of a few years after Mitchell had proven it was doable.
We’ve just proven that you can do shale at scale; four million barrels per day, in a decade, is stunning. In fact, in about four years, that will happen again, and it will happen again almost as rapidly, once we work our way through this difficult, you know, the transition to ‘high-grade’ the whole industry.
Russ: And so you’re actually saying that we’re going to become a low cost producer (
Mark: Yeah), is that right? (
Mark: I think so.) Even competitive with the Saudis?
Mark: I think the Saudis know what I just said, and I think they know it’s true. The United States, through technology, and through its ecosystem, is not only on track to become competitive with them on cost, not on price but on cost, which is frightening, because we can tolerate lower profit margins than they can. Their whole economy is anchored in the need for oil over 70 or 80 or $100 per barrel. We have businesses that can produce oil at four million barrels per day level that can make modest profits, but can make money and survive the $40 range. This is a stunning tectonic shift in the geopolitics of oil and, even as important as this, is the velocity with which the oil production can increase in America, is at a level that’s unprecedented in history. Oil production has not grown this fast in any province ever.
Russ: Isn’t this a great country we live in? (
Mark: Absolutely amazing). Well, Mark, I really appreciate you coming and sharing your perspective with us here at the Digital Leader Series, and thank you for showing up in Houston.
Mark: Thanks for having me, Russ.
Russ: You bet. And that wraps up my discussion with Mark Mills, from the Manhattan Institute. And this is The BusinessMakers Show, brought to you by Comcast Business, built for business.
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