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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Peak Shale Will Send Oil Prices Sky High

Much of the cheap oil has been produced, and the oil industry is increasingly relying on costly reserves. While the world is awash in supply right now, the market may begin to tighten up in the next few years, forcing prices higher.

But the global economy will begin to sputter as a result of higher crude prices. “The current economic system cannot sustain oil prices above $100 a barrel, and engage in genuine growth in the real economy for very long,” warned the report, authored by Dr. Simon Michaux and published by the Geological Survey of Finland. “Alternatively, producers cannot sustain oil prices as low as $45 a barrel and still make a profit.”

That’s especially true of U.S. shale. Wall Street is taking an increasingly critical view of shale, an industry which has never been cash flow positive for any meaningful period of time. As investors, banks and other forms of finance distance themselves from unprofitable shale drilling, the rate of bankruptcies is on the rise. Clearly, at least a portion of the global oil industry needs much higher prices in order to sustain growth. The production gains of the past decade were possible via cheap credit and an overcapitalized industry in North Dakota and Texas.

U.S. shale could be nearing a peak, or, at least a plateau. There isn’t a consensus on this, by any means, but a growing number of analysts and even some within the industry are eyeing such a possibility. For example, John Hess, CEO of Hess Corp., recently said that production in the Bakken could peak within the next two years and the Permian will peak in the mid-2020s. But others have said that the Permian peak may arrive sooner. Steep decline rates mean that any slowdown in the pace of drilling will quickly impact production.

The financial stress sweeping across the shale industry may bring forward the peak in shale production. But the precise date is not all that important. The problem is that the plateauing of U.S. shale, and the resulting increasing in prices, could spell trouble for the global economy. Michaux, author of the Geological Survey of Finland, cited the 2008-2009 global financial crisis as an example. Saudi oil production stalled out in the years preceding the crisis, precipitating a massive price spike in 2008, which contributed to the financial market meltdown. Related: Oil Prices Already Reflect Huge Demand Destruction

The report – which was recently analyzed in an excellent article by Vice – notes that about 70 percent of the world’s oil supply comes from fields discovered before 1970, and the bulk of that comes from 10 to 20 enormous fields. The pace of discoveries has slowed dramatically in the past decade. In fact, conventional oil production largely plateaued in 2005. Since then, U.S. shale and Canadian oil sands accounted for most of the new supply. But as the number of bankruptcies in the shale patch reveal, the new forms of oil are more costly to produce.                                                                                     

The report concedes that the oil market is currently oversupplied. But Michaux takes a dim view of peak oil demand, instead predicting that demand growth will once again begin to exceed supply growth, putting a lot of pressure on spare capacity, which will shrink to ever-smaller levels. “Oil demand is still growing by ~1mbd every year, and no central scenarios that have been recently assessed see oil demand peaking before 2040,” Michaux warns.

Roughly 81 percent of existing production is already in decline. Given that the average decline rate bounces around between 5 to 7 percent per year – which translates to lost production of about 3 to 4.5 million barrels per day (mb/d) each year – the world will need to come up with an extra 40 mb/d just to keep output flat, Michaux predicts.

In other words, the market will need the equivalent of four additional Saudi Arabia’s just to replace depleted fields by 2040. But, as previously mentioned, the major source of supply growth in the past decade – U.S. shale – is running on fumes, and needs higher prices in order to grow. Related: Can OPEC+ Rescue Oil Markets Once Again?

To be clear, this flies in the face of lot of conventional wisdom in the industry (newfound conventional wisdom, it should be noted). For instance, Suncor Energy just announced a C$2.8 billion write-down on its newest oil sands production facility, due to the expectation of low long-term oil prices. “When the price went down in 2014, I don’t think people realized that we literally were going to go (down) year over year over year,” Suncor CEO Mark Little said Thursday on a conference call. "We’re literally bouncing around, but trading sideways. When we look at the markets we think, 'hey we’re sitting in this same range going forward for foreseeable future.'”

Many industry analysts see oil prices remaining “lower for longer,” or even permanently lower. The prospect of peak demand plays into this, and the shift away from fossil fuels would relieve pressure on the global economy and prevent oil prices from spiking.

But Simon Michaux wrote in the Geological Survey of Finland that the energy transition may not be fast enough. As slowing supply growth runs into ongoing increases in demand, the result could be much higher prices in the years ahead, and a major risk to the global economy. “Money supply and debt have grown faster than the real economy. Debt saturation and paralysis is now a very real risk, requiring a global scale reset,” Michaux warned. That’s a nice way of saying that an oil price spike could cause another financial crisis.

By Nick Cunningham of Oilprice.com

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  • Bill Simpson on February 06 2020 said:
    I wrote it first. You do not need any advanced degree to figure out what will happen after oil production can no longer keep up with the demand for oil. Even ignoring the price, any decline in the total amount of liquid fuel will force the globalized economy to contract, due to less transportation being available. It takes energy to move things, and today oil based fuels provide nearly all of that energy. After oil production peaks, building batteries as fast as the oil declines would be virtually impossible. Natural gas could help, but the problem will be that by the time the problem becomes evident to enough people, it will be too late to stop the next chapter.
    If you doubt that, mention 'peak oil' and see how many people laugh and claim it does not exist.
    The shrinking of gasoline, diesel, kerosene, and propane fuels will cause a recession which will become perpetual, because once the supply of oil begins to decline, reversing that decline will be virtually impossible. The global economy will not have the money to invest to accomplish it.
    It will not take long for a shrinking economy to wreck the entire financial system because defaults on debt will expand exponentially. The 2008 financial crisis was nothing compared to the debt defaults coming after the entire globe experiences a transportation shortage and the economy begins to shrink more and more, as liquid fuels get scarce and very expensive. Expensive fuel reduces demand for everything else, which is another problem.
    Central banks will do something, but nothing they could do can work for very long because it is a physics problem. It takes energy to accomplish work. I think the attempted cure will involve massive amounts of money creation. That will soon lead to hyperinflation and complete societal meltdown. Billions of people will starve as everything collapses.
    So yes, the Fins are correct. Without horizontal drilling and fracking advances, we would already be in the first stage of the crisis. But with them, we have probably got another 10 to 20 or so years before the crisis begins. Enjoy the Petroleum Age while it lasts. There will never be anything like it again in human history.
  • Mamdouh Salameh on February 07 2020 said:
    There are four realities that will govern global energy well into the future. The first is that there will never be a post-oil era throughout the 21st century and probably far beyond. The second reality is that there will be no peak oil demand either during the same period. The third reality is that an imminent energy transition from oil and gas to renewables is an illusion. And the fourth reality is that oil and gas will continue to be the core business of the global economy long into the future.

    Another forgotten reality is that global oil discoveries peaked in 1965 meaning that the overwhelming majority of giant oilfields have been discovered already. Since then a few small discoveries have been made. All the giant oilfields in the Gulf region are more than 70-90 years old. For example, the five oilfields that currently underpin Saudi oil production, namely, Ghawar, Safaniya, Khurais, Shaybah and Zuluf are all more than 70 years old and fast depleting. Iraq’s giant Kirkuk oilfield is 94 years old and also depleting fast.

    Yet another reality is that most of the global conventional oil production peaked in the 1980s and 1990s with Saudi oil production peaking in 2005. This means that most of the cheap oil has virtually been produced with cost of new production going up steeply. With a global depletion rate averaging 5%-7% translating into an annual loss of 5-7 million barrels a day (mbd), the world needs to add a minimum 7-9 mbd every year just to maintain supplies in the market.

    US shale oil production can’t offset the depletion in global conventional oil production as it is already depleting itself. Moreover, the US shale oil industry itself is an unprofitable industry in a terminal state of decline. It will be no more in 4-9 years from now.

    And another reality is that the global economy can’t reconcile itself with low oil prices as the 2014 oil price collapse demonstrated amply. A fair oil price according to my research ranges from $100-$120 a barrel. Such a price invigorates the global economy by stimulating the three chunks that make up the global economy, namely, global investments, the global oil industry and the economies of the oil-producing countries. Of course prices surging to $140-%150 will be too high for the global economy to tolerate as the 2008 global financial crisis demonstrated equally.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Jim Langendorf on February 07 2020 said:
    I've been seeing the criticism of Exxon for spending too much on cap ex and e&p. I wonder.
    Exxon has been around a long time and has been quite successful. Is it possible that its expenditures and efforts now are relatively large on their face, but cheap in comparison to when others will do the same, when oil prices are high? Exxon is now sitting on a 3 billion barrel find off Ghana and continues to add to its reserves. E&P contractors are cheap when nobody is looking. Exxon is taking advantage of that asymmetry. When can you buy insurance? When all is calm, or when the roof is gone? Exxon and others doing the lifting now will reap extraordinary benefits when the demand exceeds the current supply, and it will. And the company, and others who followed the same ant vs. grasshopper strategy, will also be well positioned to absorb the suddenly capital deprived latecomers.
  • A Nonymous on February 07 2020 said:
    The author is a years-long peak oiler. The report is very similar to other peak oil prognostications. Nothing really notable or new. And he still lacks good recognition of the role that technology plays in lowering cost curves going forward. Or in OPEC (SA especially) constraint of supply, to raise price.
  • Louis Dimovich on February 07 2020 said:
    Three things on the horizon all but ignored in all comments and articles relating to the late T.Boone Pickens is our 100 to 150 yr sustainable supply of natural gas and it's potentially redeemable affect on reducing liquid carbonaetious demand.
    NG is plentiful with excess and still unmeasured capacity or measured reserves due to its abundance.
    NG, is cheap per BTU in comparison to oil or LNG.
    NG can power vehicles, industry and as stated the physics property of the economic engine(all activities require some type of fuel).
    NG can be stored and transported inexpensively.
    NG on the North American continent can sustain the US and Canada well into 2200 if needed infrastructure is updated and we employ efficiencies and increase our energy conservation.
    Your Peak Oil assumptions are flawed in known reserves globally, ExxonMobil and BP both assert only 70 to 80 percent of known versus unknown reserves leaving 20 to 30 percent unexplored or potential reserves. That could be as much as 5 to 6 trillion barrels based on known reserves. However that pales in comparison to NG reserves globally. NG is also easier to obtain than the unknown oil reserves which may be unattainable due to drilling limits.
    Lastly, shale oil was only enabled due to high oil prices, so it's no surprise that shale oil companies face difficulty in a cheap oil market. Shale oil companies also did not have the incentives or subsidies the big oil companies procured during previous crisis'.
    We should be worried but in a more accurate way and make the transition to NG a mandate.
  • Timothy Scott on February 07 2020 said:
    With the current proclamations from the UK and France stating all new car sales will be electric only, no fossil fuel car sales(gas/diesel); obviously this will offset the so called high oil prices to come.
  • Lee James on February 07 2020 said:
    Reader comment to-date ranges from the sky is falling to "no worry."

    The thing I'm aware of is a general lack of Plan B. Natural gas may be a Plan B, but what if it isn't, based on methane leaks, flares and getting it distributed and stored?

    Oil Armageddon stemming from expensive, limited resource is only one of the possible scenarios. Other developments that interact with oil supply and price are climate concern, world conflict, politicians who pick the wrong energy "winner," and even health concerns , like new viruses.

    How much cushion do we have in our energy needs for going with business as usual? Are we taking out "insurance policies" in our planning, as is prudent?

    We're very much "under construction." An oil-centered economy strikes me as a weak link, today, in our planning. We need to diversify energy supply and continue learning how to use less energy overall, not more. We need to do this individually and collectively -- at all levels of society.
  • Frank Foley on February 25 2020 said:
    IEA/EIA started off 2019 with predictions of 1.6Mb/d in demand growth for the year, that quickly shrunk to 1Mb/d by the 4th of July, and here was are looking back at total real 2019 demand growth was likely about 700-800kb/d. With a global economy humming.

    Of course 2020 will bring a REAL 1.5Mb/d rate of growth in 2020! So says the IEA/EIA two months ago.....now down to 1.3Mb/d in January before coronavirus hit, then down to .99Mb/d two weeks ago, then 825b/d one week ago. You get the picture.

    Eventually IEA/EIA will land on something like a +500kb/d projection for 2020 which will turn out to be padded by 800kb/d as always. Then we hit a two year coronavirus sparked global recession and demand never recovers.

    So long story short.....global peak oil demand isn't going to be 2027 or 2024 as we all thought, it was very likely 2019.

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