Whatever Happened to Peak Oil?

Whatever happened to “peak oil” – the assertion that the rate at which oil is extracted from the Earth is nearing a maximum or peak level? With falling oil and gasoline prices and a boom of new oil development in the United States and elsewhere, concern about global oil supplies have faded from public view.

But have concerns about peak oil really disappeared? What key factors have changed in the oil industry, and what challenges remain? Are we entering a new era of “abundance” or are the risks of the world’s dependence on oil rising?

Guests:

• Jeremy Gilbert – principal, Barrelmore Ltd; former chief petroleum engineer, BP
• John Kingston – president, McGraw Hill Financial Global Institute; former director of news, Platts (energy information division of McGraw-Hill)
• Steve Andrews – co-founder, Association for the Study of Peak Oil USA

Key Questions:

Cost: What are the trends regarding costs to maintain global oil production now and in the future? Are costs of developing new oil rising or are fracking and other technologies driving production costs down? Do falling prices mean that oil is getting cheaper?

Demand: What are the trends regarding global oil demand? Will oil consumption peak because of a peak in demand as much as supply? How are demand and supply interconnected?

Supply: What is the outlook for global supply? How will trends regarding costs and price volatility affect global supply? How much does price affect the outlook for supply? Do prices need to keep rising to maintain supply?

 

Takeaways:

Bullets below summarize remarks by featured guests; they are not definitive statements by The Energy Xchange. In the spirit of discourse, this information may be revised through continued discussion.

• The broad thesis regarding peak oil still holds true—that the production rate of any finite resource eventually reaches a maximum level and declines. The time that we get on the downslope of the decline curve may move and the shape may change because of technology, but “decline we will have.”

• World oil production has continued to increase in recent years, but without U.S. shale oil boom, world supply has been flat to slightly down over the last decade.

• The U.S. oil boom may be just a pleasant interlude, especially if it cannot be expanded to other countries, which may be difficult because of different geology and also different laws and policies regarding private property and mineral rights. The track record in other countries has not been good thus far.

• Basic reservoir physics hasn’t changed. Once oil is discovered, we understand pretty well how that oil will behave. There is a certain amount, some of which will be recovered and then production will peak and decline. We only see increases in production from a developed oilfield if we do something new. For example, UK offshore, fields have been reworked, smaller fields added as large fields dried up, but overall production down roughly 60 percent since peaking around 2000.

• Shale oil is no different. We discovered resources of a size that we didn’t anticipate—especially in the United States, depletion curves and estimates people made may need to be adjusted, but basic principle hasn’t changed. It’s a finite resource, certain amount of which we can recover.

• Price and technology can alter recovery efficiency, but not the size of the resource. The higher the price we are willing to pay, the more we can recover. Something early peak oil discussions didn’t emphasize enough. As technology develops, if we are prepared to pay to apply technology, which means higher oil prices, then reserves can increase for a short time, but eventually they will be depleted.

• The “don’t worry” crowd agrees, for any commodity not just oil, higher prices incentivize application of new technology. Higher prices can spur efficiency gains and also reduce consumption. We’re likely setting up for another cycle, rig count will fall, prices will rise etc.

 

Other Key Points:

• Peak oil concerns were especially prevalent around 2007 when demand was rising, especially in China, but production had flat-lined-followed by the U.S. financial crisis and price spike to $147/barrel.

• History of oil all commodity markets has been about cycles—high prices are a signal to reduce demand, pursue substitutions, and work harder and more creatively on supply, which eventually breaks back of surging commodity price. Oil, however, unlike many other commodities, cannot be farmed or manufactured.

• Peak oil camp thought that move to unconventional oil sources (shale, tar sands, etc.) would be more expensive and more environmentally damaging but also slower to come to market. However, it turned out to be just the opposite, the increase in U.S. shale oil production has been the fastest increase in 3-year period in U.S history, a staggering achievement of technology and a dynamic oil industry which the peak oil camp had underestimated.

• When prices were persistently high, many companies made a lot of money being relatively inefficient; low prices have forced companies to be efficient or get out—there is past history of this happening in the oil industry. Many companies will do just fine at lower prices, and if prices go back up, they’ll make a lot of money. However, these efficiencies have not fully arrived yet.

• Meanwhile, a lot of companies are struggling with too much debt accumulated when capital was cheap and prices were high—an important reason that we’ve seen so much growth. Overleveraged companies have gone bust but bigger, better situated companies have taken over with infrastructure and knowledge still in place. The country has benefitted and continues to benefit from these investments.

• Rising costs of developing new oil is still an issue. A year ago, Shell and other oil majors were announcing belt tightening and capital expenditure discipline, while prices were high. As a result, discoveries and new field finds have dropped off a bit. Last year was the lowest discovery rate in a number of years by majors. All prior to last year’s price drop.

• Cost is not the only factor. We’ve been drilling “sweet spots”, getting more oil at the same cost, but eventually less oil at same cost or even lower cost as industry gets more efficient.

• It will be difficult to sustain record growth rate—math is trending against us. Industry is fighting hard to maintain, even harder with price drop.

• Governments can help enhance recovery or really screw things up. Norway and the United Kingdom are examples of reasonably good management, with Nigeria and Venezuela as prime examples of mismanagement. In addition, Norway and some other oil-producing countries have directed their oil revenues in ways that invest in the future and the public good, while many other countries have used their oil mostly to address immediate financial and/or political needs.