Whatever Happened to Peak Oil?

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oil platform silhouetteWhatever 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:

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.

 

10 Comments

  1. Good summary.

    My own initial wave of concern around peak oil was very simplistic in nature. It dovetailed with my concern over the increase in tensions in the middle East and more general political and economic conditions in the early oughts. After a dozen years of near-daily reading on the subject, I’m no less concerned but I have been disabused of the notion that PO is a simple thing, or a process predictable in more than very general manner. Oil and the energy business in general is at the core of our economy (although some will argue even that) but just like the direction and specifics of the broader economy, they are extremely difficult to model.

    Which only argues the need for more sites and discussion on the subject.

    Good luck.

  2. Too bad the guys couldnt talk more about the actual economics of fracking, which more than one financial commentator has said it is not financially or economically viable long term. Nobody talked about all the junk bonds that were sold to pay for drilling infrastructure to yield-seeking investors, which have a big chance of defaulting en-masse next year at these prices per barrel. Either fracking is viable or it has only been supported by zero-cost money from the Fed or from naive investors who are going to lose a lot of money. You may need to find 1-2 people who have worked in the fracking industry (if you can find anyone willing to talk) that could add in opinions on whether it is really a short-term thing or not. Thanks!

    1. Thank you for your comment, Scott. The economics of fracking and oil extraction generally are an important subject, of course, which we will be re-visiting in future shows.

  3. The price of oil is a significant component of food production costs (our members–http://fish.coop–are small scale fishermen, dependent on marine diesel to fuel their boats) and not one that I see publicly reflected in the long term strategic planning of governments or businesses. I have long pondered the impact of rising fuel costs on the cost of food (production and transport to the wholesale market and to the customer) in the longer term and therefore – in my case – on the businesses of small scale fishermen.

    In recent years I have seen the discussion move on from peak oil (when will it run out?) to how much can we afford to burn, even if it isn’t going to run out. Mark Campanale’s Carbon Tracker has done some interesting work on this in the UK–@CarbonBubble on Twitter.

    At a conference I met a woman who had recently retired from writing 30 year strategic plans for the UK’s Ministry of Defence. Her view was that in thirty years if there are any fossil fuels available for burning, we the general public will not have access to them. Governments will secure them for their own strategic defence plans.

    It’s an interesting thought I find. How would we cope in a world where we may not be able to burn any oil – drilled or fracked – to fuel truck factories, food trucks or trips to the out of town supermarket? Should we be planning for it now? Are we? I would be interested to know.

    1. Thank you for your comment Jim. The connection between oil and food production is critically important, however research in this area seems to be still emerging and in need of much more attention. It is a difficult topic to tease out but one we intend to explore in greater depth. A big factor as you point out is transportation which will also be a focus of future shows.

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