By Tom Whipple
Events never play out the way one expects. It is now over ten years since the modern concept of peak oil arose among the rapid oil price increases that took place in the mid-2000’s. Instead of an oil shortage that many expected we would be seeing by now, the world is in the midst of an oil glut (albeit temporary) with crude prices down some 50 percent; oil stocks building steadily; and the oil drilling industry collapsing around us as oil is selling for less than it costs to produce. For most, peak oil with its specter of unaffordable gasoline prices and shortages is nearly forgotten as we are incessantly told that because of its technical ingenuity, America is on its way to an energy independence that will last for decades.
Let’s remind ourselves what peak oil means. It is the time when global oil production rises to a peak so that forever after less oil is extracted from the earth in whatever time period one would like to select. Most know that the concept of oil has gotten messier these days as people lump in all sorts of liquid hydrocarbons, such as biofuels and natural gas liquid. While these additional liquid hydrocarbons have many uses, mainly in making petrochemicals, for the most part they do not make the transportation fuels that move our cars, trucks, ships, and airplanes.
By now we have all heard of hydraulic fracking and the shale oil revolution which has increased America’s oil production by more than 4 million barrels a day in the last five years and incidentally created the current oil glut. What most have not heard, however, is that outside of the U.S. and Canada, the world’s oil production has remained stagnant during the last few years. Nearly all the growth in global oil production since 2007 has come from the astonishing growth in U.S. shale oil.
Now the modern shale oil industry has some interesting characteristics that makes it strikingly different from your grandfathers’ oil industry. Contrary to popular perception, the U.S. shale oil industry came into existence because the price of oil climbed over $100 a barrel, and because the federal government started printing so much money that even shale oil companies that were losing money could raise all they needed. The owners made money; the workers made money; the oil services industry made money; local economies made money; but the people financing the industry, partly the taxpayers, are destined to lose as shale oil and gas costs more to produce than it is selling for.
The end of the great US shale oil boom started last June when too much oil and a slowdown in the global economy combined to lower oil prices by 50 percent or more. Oil that was marginally profitable, or could be made to appear so, fell to a level that made it clearly a losing proposition. Investment in new exploration and drilling for all kinds of oil dropped quickly so that the International Energy Agency estimates that the oil industries capital expenditures will be down by $100 billion in 2015 from last year.
To keep production of the rapidly depleting shale oil level requires that hundreds of new wells be drilled every month. These new wells are no longer being drilled in sufficient quantity so that US production has already started to decline. It will, however be many months before we know where production stabilizes.
If U.S. shale oil production, which has been the only source of oil that has continued to grow in the last five years, starts to fall, it suggests that the world is or is close to the all-time peak of world oil production.
The U.S. Department of Energy, however, is currently projecting that U.S. oil production will fall in the next six months, but will recover next winter and continue to grow to new highs. Implied in this projection is that oil prices will rise again – perhaps not to $100 a barrel, but to a level high enough to entice the hundreds of U.S. rigs that have been taken offline back to work drilling those hundreds of new wells that would be required to push production above current levels. It mostly depends on oil prices, but there is one other factor that enters the equation. Shale oil fields have “sweet spots” where enough oil comes out of nearly every newly drilled well to sort of pay for the high costs of drilling and fracking the new wells – most of the other shale drilling sites don’t do this. For now drilling in shale oil fields is concentrating on the sweet spots where new wells can at least give the impression they will make money – or at least when prices go way up.
Places to drill in the sweet spots are being used up quickly and recent analysis shows that initial productivity is dropping in the more productive parts of the shale fields too. The shale oil boom in the U.S. may not have much longer to run even if prices rebound substantially in the next year or so.
There is more to the peaking of oil production than simply U.S. shale oil however. Middle Eastern production is currently down about 2.5 million b/d due to geopolitical problems in Libya, Syria, Yemen, Sudan, and Iran. Only Iran seems to offer much hope of getting out of its sanction problems in the near term, thereby possibly adding up to another 1 million b/d to the world’s oil supply. Even this seems problematic at the minute, however.
When all the myriad factors bearing on the peaking of world oil production are weighed together, it still is impossible to reach a conclusion just yet. It should be noted, however, that if U.S. oil production declines significantly this year and prices remain relatively low, there is a chance that world has seen the all time high of oil production. It still will be many years after the fact before the peak whenever it comes can be confirmed for real.