By Tom Whipple
We can thank Saddam Hussein for contributing the saying “mother of” to the English language when he declared that any attack on Iraq would result in the “mother of all battles.” When applied to the peak oil story, “mother of all bubbles” fits nicely into the times in which we are living. Students of history know that the world has been through many economic bubbles when economic optimism drowned out objectivity. Most of us remember the dot.com and housing bubbles of recent vintage.
Our current bubble is shale oil, which if the media, pundits, and even the government are to be believed, will soon bring us 30 years of prosperity. America will be energy independent; we will become the world’s biggest oil producer; a major oil exporter; prices will fall; and jobs will be created due to all the oil and natural gas that is flooding the country. Mexico, Brazil, deepwater Gulf, Canada tar sands – oil will be coming from everywhere. They might even have to give the stuff away as they do in Venezuela.
There are, of course reasons to doubt that all of these potential sources of oil will be supplying us as much oil and gas as some believe – at least not at affordable prices – in the near future. For the present, however, it is clear U.S. shale oil production has reached bubble status. Hardly a week goes by without a story on how, thanks to horizontal drilling and “fracking” of impervious rock, American is on its way to energy independence and a bright new future as the world’s biggest energy producer.
Never mentioned in these stories is the cost involved in drilling and fracking the new horizontal oil wells; the fact that these new wells are nearly dry in two-three years; that the natural gas producers are going broke; or that the future of deep water oil production is not looking so good due to high and rapidly rising costs of production. Also lost in the euphoria is the undeniable fact that the world’s existing oil wells are drying up at the rate of 3-4 million b/d each year so that it is taking all the efforts of the oil industry just to keep conventional oil production flat. The growth in what is loosely deemed “oil” these days is now coming from fracked wells, biofuels, natural gas liquids, and mythical “refinery gains” in which the products of refining take up more volume than the original crude did. No real energy comes from these refinery gains, just more full barrels.
Last week the Department of Energy added its weight to the euphoria by announcing that the US shale oil boom is going to be bigger and last longer than anyone thought. Instead of contributing only 2 million barrels a day (b/d) to U.S. crude production, shale oil output will climb by another 2 million b/d in the next three years so by the end of 2016 the US will be producing a grand total of 9.6 million barrels from all sources. To make matters even better, the government says this level of production will continue until 2021 after which it will decline so slowly that we will never notice. How’s that for a Christmas present?
The problem, of course, is that this optimistic scenario is highly unlikely to play out the way our government is telling us. The Department of Energy’s optimism probably is based on the spectacular increases in fracked oil production during the past two years – far exceeding what the government’s analysts had been expecting as recently as last year. This recent surge in production, however, came at a price. The most productive places in our shale oil fields are being drilled first and intensively. Why drill a well that will only produce 300 b/d day when for the same money you can drill one that will produce 1,500 b/d or more? In the U.S.’s two most productive shale oil deposits drillers have been directing their efforts to a very limited number of “sweet spots” where they get the most profitable results. When places to drill in these sweet spots are gone, growth will be over.
Rarely put into context is the rapid decline in production from fracked oil wells. According to the EIA, it is currently taking more than 7 out of every 10 barrels of oil produced from new fracked wells just to maintain production from existing wells. This number is climbing rapidly. When 10 out of 10 barrels of new oil production go to maintain production, it is game-over.
How soon 10 out of 10 will be reached is a matter of some debate. Some observers believe it can happen as soon as 2014 in which case the government’s 4.6 million b/d of US produced oil will never happen. Others see the shale oil continuing to grow into 2015, 2016, or even 2017 but not at the 600,000 b/d each year as the government says. Nearly all outside observers agree, however, that when places to drill productive new wells run out, shale oil production will decline at circa 45 percent a year and will not continue to provide large amounts of oil into the 2040s as we are being told.
All this says we are getting close to a turning point in the history of our oil production in the next year or so. Either U.S. shale oil production continues to climb at spectacular rates or the industry will be unable to increase production by enough to offset decline. By the end of 2014 we should have a better idea of whether recent trends will reverse or carry on for a while.
All economic bubbles eventually break causing varying amounts of economic damage. When the America’s shale oil bubble breaks it is likely to be serious for these sources of energy have been making major contributions to keeping our economy growing in recent years. When the shale oil is gone, economic conditions are likely to get much tougher as conventional sources of oil are drying up steadily and energy costs are likely to go much higher.