Ten years ago this week—July 11, 2008 to be exact—the price of a barrel of oil on the New York Mercantile Exchange hit an intraday high of $147.27, its highest price ever. By the following autumn the world economy was in shambles and the price of oil was tumbling. The oil price eventually bottomed out around $34 per barrel in mid-February the following year.
Oil prices started 2002 at around $20 per barrel and then rose almost continuously until mid-2008. As they rose, the world's best known critic of peak oil* prognostications, Daniel Yergin, began to look so foolish for having predicted ample supplies for decades to come that his firm finally reversed itself in mid-2008 and began to forecast higher prices. That should have been read as a contrarian signal; just two months later the oil bull market ended.
Peak oil thinkers at the time believed that their forecast of a nearby all-time peak in the rate of world oil production had been fulfilled. The official numbers seemed to confirm this. Petroleum geologist Kenneth Deffeyes' had made a half-serious prediction that Thanksgiving Day 2005 would mark the all-time high for production. Production of crude oil including lease condensate (which is the definition of oil) was slightly more than 74 million barrels per day (mbpd) in December 2005, but thereafter declined.
Despite high and rising prices, oil production failed to exceed that number for two years. In December 2007 production inched above the previous high mark and stayed there through July 2008, the month the oil price peaked. That month the world produced slightly more than 75 mbpd.
In August production fell by more than one million barrels and did not surmount 75 mbpd until two years later.
Robust demand in an era of stagnant supply had sent prices spiraling upward. Those high prices became a contributory cause of the worst economic calamity since the Great Depression. A moment of high drama seemed to coincide with the peak oil moment in world history.
But what if peak oil is a process rather than a moment, a process with a series of twists and turns filled with sometimes ambiguous and counterintuitive signals? If so, it might look something like what followed.
When the economy rebounded and oil prices rebounded with it, the peak oil thesis seemed reconfirmed. The International Energy Agency had noted in its 2010 World Energy Outlook (page 48) that the rate of production of conventional oil had, in fact, peaked in 2006 and that unconventional supplies would thereafter have to provide the world's oil supply growth.
As it turned out, world oil production plateaued bouncing between 73 and 76 mbpd until late 2013. Not surprisingly, this constrained supply brought on high prices. In fact, the years 2011 through 2014 experienced the highest ever average daily prices for crude oil, higher than the average for the year of the price spike.
This fact, however, was obscured by the fawning media coverage of increasing supplies of shale oil in the United States (properly called tight oil) which did little to stem the price rise.
One lonely voice, petroleum geologist and consultant Art Berman, pointed out that the companies drilling for this oil were almost all free cash flow negative—even as oil prices levitated over $100 per barrel and stayed there. (Free cash flow is operating cash flow minus capital expenditures.)
Berman said the economics just didn't support bringing the shale oil out of the ground. But investors didn't listen and kept handing new investment capital in the form of both equity and debt financing to the drillers. Without this capital the drillers would not have been able to continue growing their production since their operating cash flow from existing wells came nowhere near the amount needed to grow production.
Today, we know that Berman was right. This fact became more apparent when oil prices declined in 2014 and kept going down. Several drillers went bust. But even as much of the industry remains on life support, those companies currently drilling in the Permian Basin in Texas are involved in yet another bizzare free-cash-flow-negative boom. The Permian has become a Wall Street darling even though it's actually the latest place where capital goes to die.
Two countries, Canada and the United States, have been largely responsible for growth in world oil production since 2005. The extra oil came mostly from the tar sands in Canada and the tight oil fields of the United States. Oil production rose smartly in both countries as long as prices stayed aloft. But the price decline that began in 2014 and ended with Brent Crude at $26 on January 20, 2016 caused Canadian output to stagnate and U.S. production to decline.
Output in both countries has now rebounded with U.S. production eclipsing the production peaks of the previous boom. Almost all production growth is coming from the Permian Basin in Texas where a drilling frenzy fueled by the flood of new capital mentioned above continues.
Berman's analysis of the Permian details financial conditions that no peak oil thinker could ever have imagined. Let's take a few moments to see why this is so.
Related: Do Crude Producers Really Want Higher Oil Prices?
One of the criticisms of peak oil thinking is that it doesn't take into account economic factors. A second criticism is that it fails to recognize so-called unconventional oil resources such as tar sands, tight oil, heavy oil and arctic oil. Both criticisms are false, at least as they apply to the top-tier thinkers such as petroleum geologist Colin Campbell.
As far back as 1996 Campbell recognized that high oil prices would dampen oil consumption and delay or draw out the peak. But neither he nor other thinkers believed that unconventional oil resources could do anything more than soften the rate of decline in worldwide production. The reason was that such resources would be expensive and difficult to extract and would therefore not enter the market quickly enough to overcome the decline of conventional oil production.
Now, here is what peak oil thinkers couldn't foresee: That investors would subsidize the production of vast amounts of oil rather than seeking a return on their capital and that they would do this year after year even in the face of the obvious financial evidence. Essentially, Wall Street has been subsidizing the consumption of oil on Main Street.
That this is unsustainable is obvious. Eventually, investors will realize that there is no long-term value in tight oil. For now, the flood of oil from tight oil formations has conjured the illusion that the world needn't worry about oil supplies anymore because of the "miracle" of hydraulic fracturing, often referred to as fracking. (Why investors have been cautious about additional investment in the Canadian tar sands, but not American tight oil is a truly puzzling question.)
The recent rebound in oil prices should spur some investment elsewhere, especially where genuine financial returns await. But the punishing price decline in oil from 2014 to 2016 and the slow recovery that followed has resulted in deep cuts in exploration and development throughout the industry (if not so much in the U.S. tight oil fields).
In response, the International Energy Agency has been waving its arms for some time that this dearth of investment will mean constrained supplies after 2020. In addition, Rystad Energy, an independent energy research firm, reported at the end of last year that 2017 saw a record low in oil discoveries. It noted that exploration expenditures had dropped 60 percent from 2014 to 2017. Without a substantial reversal of this trend, the firm expects supply deficits. (Translation: There won't be enough oil to go around in the not-too-distant future.)
Meanwhile, writer Gail Tverberg has been pounding home her counterintuitive thesis that peak world oil production won't be accompanied by high prices. Rather, it will be the result of prices too low for much of the remaining oil to be extracted profitably. In other words, in Tverberg's opinion there isn't an oil price that is both low enough to avoid economic stagnation (i.e., a price that consumers can readily afford) and yet high enough to incentivize oil companies to extract sufficient quantities of oil to prevent a decline in the overall rate of production worldwide.
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It seems the first part of her analysis is proving correct with regard to tight oil production and probably tar sands, deepwater and arctic oil. But the fact that tight oil extraction remains by and large free cash flow negative and yet continues to attract investment has obscured her underlying financial logic.
Related: The New Oil Cartel Threatening OPEC
Investors, however, won't keep subsidizing expensive tight oil extraction for the benefit of the masses indefinitely. As economist Herbert Stein once said, "If something can't go on forever, it will stop." When it does stop, one of three things will emerge:
- New extraction technologies will have lowered the cost of tight oil production sufficiently to bring those costs into alignment with what consumers can afford on a long-term basis.
- Demand for oil will have declined sufficiently because of efficiency or migration to other energy sources, say, electricity for transport, and so the decline of investment flows into oil exploration won't matter.
- The world will be headed toward, if not already in, its next oil crisis as prices rise to a level that makes tight oil production genuinely profitable.
The first result seems unlikely as innovation cycles are very long in the oil industry, sometimes taking 30 years to reach maturity. The second is possible only in the longer term and only if countries worldwide put themselves on the equivalent of a war footing to speed up their transformation. The third result seems the most probable outcome as the lack of investment in oil exploration is likely to show up in two to three years.
Whether the next oil crisis will mark the all-time peak in worldwide oil production is unknowable. If it does, the reprieve provided by what we now know has been investor-subsidized tight oil will have been a dangerous detour—one that delayed a transition away from oil when the price spike of 2008 and the record high prices of the early part of this decade should have made clear that such a transition was urgent.
* For the uninitiated, peak oil in this context refers to the moment in time when the worldwide RATE of oil production reaches a peak and thereafter enters a permanent but possibly bumpy decline. It does NOT, as many wrongly claim, mean the world will run out of oil. In fact, oil will continue to be pumped as long as human society has a need for it and can afford its extraction. The cost of using oil as our main energy source, however, may be too great for the economy to bear in the long run after the peak.
By Kurt Cobb via Resource Insights
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This is when our ever increasing world oil demand was being supplied using uneconomic shale oil supplies (due to ZIRP) & conventional oil supplies together. The needed high priced oil from deep-water oil & shale oil, & tar sands were and are all needed to meet world increasing demand now as well as in the past.
This has been explained by a working peer Geologist over the last several years. Art Berman should be credited with seeing how conventional oil and uneconomic oil resources were both needed. I've used Art Berman's data & other information along with my own data to comment/lecture on how the economic conventional oil & expensive unconventional oils were all needed to meet rising world oil demand.
Art Berman should be commended for his work. He very much understood world oil demand & how conventional & unconventional oil resources were being used to meet World oil demand. Art was ahead of his time. Regards. Will send a much more complete synopsis evaluation of world crude oil needs.
Ni mention of cash positive efficiency if gas/oil steam powered electrical power generation continues growing over cheap short term plastic wind/solar.
There is a lot of brainless capital playing politics.
It it not possible to hide these truths for long.
Oil is so critical for transportation that demand for it will continue to increase due to more, and richer, people on the planet. The supply is finite, with the easy oil being produced first.
Soon, probably before 2030, the decline in existing oil fields, and the coming decline of tight oil production, will combine to limit any more growth in total oil production.
Ordinarily, that seems like no big problem. In 1975, I stood on top of the Plaza Tower in New Orleans watching everything being moved by oil on the Mississippi River, on the freeways, and in the sky. Suddenly, I realized what would happen when the oil doing all of that, started to run out. I comforted myself by thinking that I would be long dead before having to experience what trying to survive when that day came, would be like.
In the years since, I thought that it might not be as catastrophic as I feared because the economy could slowly shrink as the oil shortage got worse and worse. People alive then wouldn't starve. They would just slowly get poorer as living standards gradually fell. So I felt better.
After the 2008 financial crisis I realized that I was wrong. Oil won't be the first problem. It will be the banks. Banks are designed to function in an economy which is expanding, as it has done since the Industrial Revolution. They don't do well during depressions, when the economy is shrinking, and debts go unpaid.
Soon after global oil production peaks, the world economy will begin to shrink. That will happen because it takes energy to grow food and move goods. There is no way batteries and electric vehicles could replace the energy which will be lost from the continually shrinking supply of oil.
Once oil peaks, no amount of investment is likely to reverse the decline due to the Law of Diminishing Returns. Every additional barrels gets more expensive to produce. Eventually, you use more energy than you get out, or more resources are expended than the oil provides. Although it is quite unlikely the oil industry will survive that long.
Within a couple of years after the economy is forced to begin shrinking from a transportation shortage, the banking system will become so stressed that it will collapse. It nearly happened in 2008. If you doubt it, I suggest you watch some of the documentaries about the 2008 financial crisis on YouTube. Since virtually nothing can happen without functioning private banks, the economy will soon collapse, and billions of people will starve to death, with billions of barrels of oil still in the ground.
I could be wrong, but with debt at all time record levels, I doubt it. So you might want to keep an eye on total yearly oil production. When you see it stop increasing for a few years without being in a recession, you have a few years of normal life left. We are lucky fracking and horizontal drilling came along. That gave us about a decade of extra time before the peak arrives. My guess for the first hint of problems is around 2023. But that is just a rough guess. It could be as late as 2030 before the peak arrives. And it will take a few more years until total production starts to decline. But once it does, it will decline forever.
So enjoy the Petroleum Age while it lasts. Black gold enabled you to live during the best era in human history.
In the end I do think this all boils down to two things: a) when is the Fracking bubble going to burst and b) what will happen in China.
a) you discussed at length.
b) is something that may change the picture relatively quickly quite dramatically. The China situation is very intransparent and nobody knows how much oil they really need (and how much goes into their reserves). Also, China is the country with the most serious / largest scale transport electrification efforts. I would not be surprised if China will trigger a peak oil demand situation pretty much at will whenever they decide they don't need expensive oil any longer...
While conventional oil production (that is oil gushing from underground on its own volition) peaked in 2006, unconventional oil such as US shale oil (tight oil), Canada’s tar sand oil and Venezuela’s extra-heavy oil has come on the scene though it is very doubtful they will be able to bridge the oil supply gap in coming years.
And despite claims about rising US oil production (mostly shale oil) to 10.7 million barrels a day (mbd) so far this year, its impact on the global oil supplies is limited. In 2017 the US produced an average of 9.36 mbd and consumed 19.92 mbd thus having to fill a supply need of 10.56 mbd by imports. This is despite the hype by the likes of EIA, IEA, the 2018 BP Statistical Review of World Energy and the Financial Times in cahoots about the great potential of US shale oil.
The US shale oil industry is not a profitable industry. Shale oil drillers continue to produce at loss in order to attract more investment from Wall Street to stay afloat. They are like ‘robbing peter to pay Paul’. Without this capital the drillers would have gone bankrupt long time ago.
Peak oil theory is a reality despite the continuous hype about the potential of shale oil. What peak oil proponents could not have anticipated is that investors would subsidize an unprofitable and unsustainable shale oil industry. Eventually, investors will realize that there is no long-term value in Shale oil.
The fact that investors have been cautious about additional investment in the Canadian tar sands, but not US shale oil is due to the keen intention of the United States to be in a position to influence the global oil market through its manipulation of oil supplies and prices for geopolitical and economics reasons.
Still, nobody is paying enough attention to the fast-approaching oil supply gap probably as early as 2020. This is due in large part to an oil investment drought marked by three years of consecutive decline in oil prices and the lowest oil discovery rate in more than 70 years according to the IEA.
By 2020, 15 mbd of new oil supply may be needed to meet a projected annual average rise in global oil demand of 1.59 mbd and also offset an annual natural depletion rate in global oil production estimated by the IEA at 5% or 4.8 mbd, virtually equivalent to losing the current output of Iraq.
A lack of investment will cause oil production to decline steeply and 80% of the current new oil supply is needed to offset natural declines.
As for a post-oil era, a few experts have been saying that a widespread electric vehicle (EVs) use could spell the end of oil. The tipping point, they reckon, is 50 million EV on the roads by 2024. However, 50 million EVs could hardly make a dent on the global demand for oil let alone replace it. They will only reduce the global demand by only 1.1 bb, or 3.4%. This will neither be the end of oil nor a tipping point. A tipping point for oil could only be reached once 739 million EVs (50% of the current global number of internal combustion engines (ICEs)) are on the roads worldwide within the next fifty years. This is impossible to achieve within that time frame.
Oil will continue to reign supreme through the 21st century and maybe far beyond. A post-oil era is a myth.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Where will we see big increases in hybrid autos? Most likely, the large cities of the West, where political pressures are likely to force adoption of zero-fuel-burning inside city limits for health reasons. Once that trend starts, the push to electric bicycles, electric motorcycles, electric cargo-bikes, and hybrid autos running in electric mode will take off. As vast amounts of fuel are burned by cars idling in city traffic, this should have a hefty impact (with the proviso that consumption in the developing world may well negate it all).
The other aspect, which remains unexplored by writers on Oilprice, is the possibility of a major tunnel-boring deployment in the USA. If you were to construct road tunnels at grade at the 100 busiest mountain traverses, the total consumption of liquid fuels in the US would likely drop by 7 million bpd. Those hundred tunnels, at say 1 billion apiece, represents a CAPEX of only 100 Billion, readily achievable by Washington. A 7MMbpd drop in US consumption is going to have a dramatic effect in the oilpatch. Yet this possibility remains unremarked upon.
Why a lower bound on the oil price at which consumption may continue grow is important is that it is driven the emergence of alternatives such as renewable energy and vehicle electrification. Essentially the value of oil is capped my competing alternatives to oil. As the cost of those alternatives decline so does the value of oil. Meanwhile the cost of oil looks to grown based on geological scarcity. So once the value of oil drops below the marginal cost of producing more oil, oil enters the stage of structural decline.
This is a far more optimistic theory than the one Tverberg envisions. In her view, only price of oil so high as to kill growth in the global economy will bring about peak oil. This would imply catastrophic economic consequences for the world. She refuses to accept the idea that renewables and EVs are falling sufficiently low in price so as to all the economy to continue to grow even as it uses less oil. We should at least take heart that in this period within which shale oil have been willing to expand the oil supply at below cost, EVs and solar have continued to grow at 55% and 35% per annum. They have not been so high priced as to allow an oil glut to halt their advance in scale. I am confident that they will continue to ramp up to significant scale whether oil soars above $100 per berrel or crashes below $35. Indeed, we ar rapidly entering a pricing regime in EV that beat the refining and distribution costs of motor fuels, implying that no positive price of crude is low enough to beat EVs. The question is only how quickly can ramp to significant scale of manufacturing .
Otherwise, the United Stattes is full of companies that were unprofitable during a long time and give splendid returns to investors.
the opec guys are doing a mistake, with the high prices they created they are also creating more competition that will result in lower prices in the not so distant future.
I have not mentioned solar, wind, geothermal or hydro but they are constantly thought of and will play important roles when they are ready. Nuclear is the most expensive over the entire lifespan and taking in all of the cost factors.
Much of the "new technology" that is supposedly going to wean us off fossil fuels if incredibly dependent on specialised products produced from petrochemicals. Base petrochemical growth is something like 3.5% per annum and will place additional burdens on the oil supply. As gasoline demand weakens due to electrification of light vehicles some of the light distillate fuel will be diverted to petrochemicals but in my opinion the this will merely balance over time. The last few years have seen strong demand growth in Asia, particularly China, and India is planning some very significant expansions on oil refining capacity - one project alone will consume 60 mt of oil per year. China is still expanding it refining capacity at an unprecedented rate.
Transportation fuels demand will continue to grow as exploding populations put ever more pressure on the food supply and lead to unsustainable agricultural practises that will be ever more energy intensive. Shipping of goods and raw materials will ensure a growing demand for marine fuels, which will not be met by methanol. LNG might be an option but diesel will be king. There is no alternative to jet kerosene that can be produced in sufficient quantity at an affordable price. Road trucks will be predominantly diesel powered for the foreseeable future.
Bio fuels will remain an illusion. Thermodynamically challenged at every step and a corollary to shale oil and gas production. Investors gave up on biofuels and are likely to give up on shale as the promise of profits remains far away. True, some shale oil and gas co's made some money but not much. In 2016 the top 150 oil companies in the US turned over $477 billion and collectively lost $47 billion. Only 23 made a profit which was $13 billion, of which Exxon made $8 billion. Source - Oil and Gas Journal. In two months the OGJ will publish a summary of the 2017 results. Better, but far from acceptable. Just as the pricing picks up the costs start to balloon again. I will side with Kurt Cobb and Art Berman. Both have vision which is more than you can say for nearly all of our politicians who suffer exclusively from groupthink and a herd mentality, unable to see the wood from the trees
These are called "long term strategic investments" and yes, speculation is involved.
Lease rates today are 30x (or more) the lease rates paid 12 years ago in ND.
Ask Harold Hamm how it's done.
The same acreage today, produces more oil in thirty days than the entire life of the well drilled to secure the lease in 2007 and the well costs half as much to drill and a third the time.
The President's good office is yet one more variable in the ebb and flow of oil. And yes, Rome did not fall in a day.
Higher prices will be driving the movement to EVs. And cutting miles driven. The coming fleet of EVs is something that the industry has never seen. They don't need to take away 100% of oil to have an effect. Just 5% or 10% will have a major effect. WE have China and Tesla driving this movement. The change to EVs will not follow a straight line. It follows an S curve going exponential. Many people (including me) will be giving up driving. 10% or people who traded in their car traded it for no car. For me I have not owned a car for 7 years. Never believed that would happen. Retired. Car blew up. Never got a new one. Doesn't fit in my budget anymore.
Adding 20,000 M3 long range EVs may only be a drop but everybody is adding them now. Unbelievers are becoming believers. Competition is making EVs more realistic. Falling solar and storage prices. The competition to greater renewable efficiency will only speed this process..
Dr Salami's realistic projections are very insightful and are much akin to Art Berman's assessments based on assimilating global crude oil data and actual financial impacts from events from both the past, the recent, and the projected future of crude oil events. Especially their comments regarding shale oil (tight oil).
He did not address natural gas and/or LNG's role in world energy scenarios, but that is a different topic. Thank you Dr Salami for your very realistic and concise assessment. There will be folks that do not agree with your pragmatic views, but those individuals most likely will be driven by their own self interests. Regards.