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Energy Insights: Energy News: Peak Oil Has Officially Peaked

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Peak Oil Has Officially Peaked


The idea that we will use up all of the earth’s oil has just gone from extreme to ludicrous.

According to a new report by BP plc (BP), the oil game has significantly changed over the last few years.

What you thought you knew about how the oil industry works is wrong. But that doesn’t mean we are in any worse shape than before. However, if you are even thinking about getting into today’s incredibly low-priced oil company’s stocks, you need to pay attention.

BP’s report, titled "New Economics of Oil," lays out why conventional thinking about oil production and prices is all wrong.

For starters, the "Beverly Hillbillies" idea of get-rich-quick oil finds is over. Oil is not something that is found in huge quantities that can be traditionally drilled for decades anymore.

Geologists have gotten darn good at finding the big fields, leaving new ones in short supply.

So, according to BP’s Spencer Dale, instead of the big oil finds and decades of production, the industry is now turning into a more "manufacturing-like" process. Here’s what that means.

Conventional wells and fields are still the breadwinners in the industry. That’s where the huge multinationals still compete — companies like ExxonMobil (XOM), Chevron (CVX) and even the author of this report, BP.

However, with the thousands of independent "fracking" and unconventional operators, especially in the U.S., production is more flexible.

Back when these new techniques really started taking off — about a decade ago in the U.S. — traditional drillers stayed away from them because of the short-term benefits of those technologies.

That is, the total production from shale oil wells drops off the chart after the first year.

As you can see in this chart, after the first year, production in the Bakken shale basin dries up by 75% after the first year. Meanwhile, in the Gulf of Mexico — something BP knows a thing or two about — production takes nearly a decade to slow that much.

But that doesn’t mean there’s no value in short-lived wells.

You see, for a company like BP to begin production at a traditional onshore — or even offshore — site, it takes years and sometimes decades to get the permits … buy and construct the platforms and equipment … and reach peak production levels.

For an unconventional independent driller, they can just pick up their equipment from a well that has already fallen 75% in production and move it a few miles down the road. It can begin producing within a year already at that site’s peak levels.

Shale producers don’t have to build new equipment. They don’t have to go through the same regulations and restrictions — simply because most of these sites were already used once when they could produce conventional oil. And they can move down the road at any time they please.

That flexibility lends itself to a more sustained approach to production. Unfortunately, these producers boomed too much right out of the gate.

If you haven’t seen the effect of shale production for total U.S. output, take a look here:

But with the most recent price collapse in oil, that period is over. Producers are starting to make more economic choices on where to drill and how much to produce.

As the U.S. Energy Information Agency and more recently OPEC predicts, next year will be the first year since 2008 that U.S. oil production falls.

But this shale trend isn’t going away.

For starters, just because we had record-breaking production growth over the last decade here in the U.S. doesn’t mean these shale producers have used up all that new recoverable oil. In fact, according to this BP report, "total proved reserves of oil … are almost two-and-a-half times greater today than in 1980."

When oil prices recover — and nearly everyone agrees they will — shale will be back in business. But instead of flooding the market with excess oil, as many believe it has, it will be used as a buffer to both take advantage of higher prices and to keep up with demand.

Essentially, shale will smooth the price volatility going forward. That’s what BP means by a more "manufacturing-like" industry.

Conventional drillers will continue to produce their large oil fields for decades on end. And shale producers will get in when demand and prices are high and out when supply catches up.

That doesn’t mean we won’t see the kind of volatility we all have grown accustomed to in the oil industry going forward. In fact, at times, it could be worse than ever.

You see, traditional drillers like Exxon and Chevron are loaded with cash. They also have international operations that give them geographic diversification. So their cash flows and balance sheets can sustain periods of tight credit — like we saw in 2008-’09. Sure, those companies saw their share prices cut with the rest of the market, but you didn’t see Exxon go bankrupt.

The opposite is true for independent shale producers. They tend to be far smaller and have lower margins. So if credit becomes tight again — say, if interest rates rise too fast — they will suffer. They won’t be able to expand enough to cover their short-term production issues.

So imagine a scenario where the Fed raises rates just when oil begins to recover. If the Fed goes too fast, these shale producers will need credit the most at just the time when it becomes harder to come by.

This brings us back to a theme we’ve hit on pretty regularly over the last few weeks (here and here). There’s a great opportunity in the market for a massive consolidation in the oil industry.

Those large companies have the cash and motivation to begin scooping up the smaller independent drillers. But now, with this new approach to the industry, that consolidation could continue even if oil prices climb. It all depends on interest rates at that time.

The best way to play it remains to own the larger producers. Right now, it would be impossible to know which of the small shale players will be left out in the cold when credit begins to tighten … and which ones will be targeted by the likes of Exxon, Chevron, Shell, BP and Total.

But if you don’t have some of your long-term investments in oil, now’s the time … even if production declines for the first time in eight years.

Happy trading,

The Uncommon Wisdom Daily Team

Your thoughts on “Peak Oil Has Officially Peaked”

  1. What does the sentence “The idea that we will use up all of the earth’s oil has just gone from extreme to ludicrous” have to do with peak oil?

    1. Yeah, Andrew; there has been so much hyperbole injected into the peak oil debate, it’s hard to focus on the repercussions of a decline in our most critical energy source, and we lose focus on developing reasonable responses. This increases the likelihood that most people, including policy and decision makers, won’t view this as a priority. Considering current depletion rates, economies may be blind-sided, finding themselves unable to afford whatever production is available in the near future. It’s not like we haven’t been warned for years, albeit in some bizarre ways:

  2. “The idea that we will use up all of the earth’s oil …”

    This first line exposes the entire article as a strawman. That is not what ‘peak oil’ infers. Indeed, peak oil theory posits that industrial society will NEVER be able to “use up all of the earths oil”, due to economic and geological constraints. Peak oil is merely the point at which the rate of oil production peaks; nothing more, nothing less. What the implications of that are/will be is open to debate, but considering that petroleum is “life blood” of economic growth, without other energetically equivalent sources, (net energy available to do work), especially liquid fuels, economic growth will not continue as in the past.
    There will, at some point, be a peak in oil production, globally. No way around that. It’s a finite resource; a one-time endowment being consumed at a phenomenal rate.

  3. I would like to see a breakdown of those new reserves, the ones that have apparently gone up by 2 1/2 times since 1980, as it is more relevant to the topic of peak oil, as Ghung mentions the whole point about peak oil is flow rates, not worrying about it “running out”.

    Here I think we will find that much of it is heavy oil from Venezuela, tar sands from Canada etc, in other words much more expensive, and by expensive we mean it takes more energy to get out and use.

    The US oil patch is currently underwater with debt, 260 billion dollars of it, I really do not believe the fed are going to raise interest rates any time soon though, exhibit A is the fact that US government debt has been going up exponentially for 40 years. But the big unknown is how much of this tight oil is available outside the US? We have a rough idea how much is inside the US and it is not an inexhaustible supply, more like 15-20 years.

    So it all still follows the peak oil theory, a theory that says as we use the cheaper sources first and then progress onto ever more expensive sources, which is what we are doing today, our production is also peaking despite QE, ZIRP and every other central bank trick to try and stimulate demand. Couple that with the state of the economy where debt is expanding at a far faster rate then production and we appear to be post peak oil, the ride down this second half slope will be a long and bumpy though.

  5. R.J.Spoley says:
  6. Peak oil is an interesting concept regardless of the economics, value, availability, quality or volumes and extraction rates. The key here is time frames and population sizes using the oil. Most of the parameters being discussed have relatively short time frames. Say 5 – 20 years. Once you start talking about time frames like 50 -150 years the whole scenario changes and new parameters come into play. Mostly governmental. Oil fields just don’t last that long. That means that new fields have to be continually found to keep up with increasing demand. Either that or different energy sources have to be developed/found or we’re all toast. I don’t see any discussions involving those scenarios.

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