The Welcome Death of Peak Oil

Improved technology and more efficiency mean North America could eventually become an oil exporter

Does anyone remember Peak Oil theory? With Canadian and U.S. oil production booming enough to lift worldwide oil production, the mongers of the claim that half of the world’s ultimate crude oil reserves had been produced and production was irreversibly declining have fallen silent. I’ve always considered Peak Oil theory geological gibberish, and wrote as much in 2008, when oil prices peaked at around US$147 per barrel. I was surrounded by voices claiming prices would soar, heating a home would become unaffordable and world trade would all but collapse.

Months later, world oil prices collapsed to about US$30 per barrel. Then a funny thing happened. Oil production in Canada as well as the U.S. – long written off as a virtual resource wasteland – began to creep up, then roar. Today, musing that energy-independence is within North America’s grasp is less fanciful than Peak Oil theory.

What happened? Drilling oil wells downward and then horizontally to expose more of the reservoir rock to the wellbore, and then applying hydraulic pressure to crack the rock and expose still greater surface area, began transforming geological reservoirs that had been technical riddles or economic losers into gushers of oil company cash flow.

The shale oil and “fracking” revolutions confirmed the once-famous, now-forgotten statement by geologist Warren Pratt that, “Oil is found in the minds of men”. The un-PC use of “men” makes it anachronistic today, but it was a brilliant refutation of Peak Oil theory, coming decades before its formulation by R. King Hubbert in 1971. Pratt had the shrewder understanding of both geology and human nature.

The fact is, governments have almost always thought their countries were about to run out of oil, because the technology of every age is capable of producing only so much, or because government regulation or corruption themselves hold back a country’s oil production (look at Venezuela). Hubbert’s theory actually depends on technological stasis. As it happened, world oil production never quite turned the predicted corner to terminal decline. Instead, there have been successive waves of growth as technology and/or pricing spurred industry activity everywhere from the inventor’s shop to the drilling roughneck out on the prairie.

Out on those prairies, the horizontal drilling/multi-stage fracturing revolutions allowed the U.S. in 2012 to record the largest single-year growth in its history. It was also that country’s fourth straight year of growth, and the largest production growth of any country worldwide. Last year, U.S. oil production reached 8.9 million barrels per day, about 10 percent of world production. With 1,400 of the U.S.’s approximately 1,800 drilling rigs going after oil, further growth lies ahead.

In Canada, the long grind to make the oil sands viable hit its pace a few years ago, and oil sands production is now nearly 2 million barrels per day (much of that also thanks to horizontal drilling, but without fracturing), while conventional production is also reviving. By 2030, according to the Canadian Association of Petroleum Producer’s latest forecast, Canada’s oil production will reach 6.7 million barrels per day.

North American oil consumption totals about 21 million barrels per day. Assume U.S. oil production grows by another 2 million barrels per day over the next 15 or so years – a modest assumption. And let’s say overall consumption remains flat, also not unrealistic given gains in energy efficiency, reductions in economic energy intensity and fuel-switching to cheaper natural gas.

That would cut North American oil imports to about 3 million barrels per day, representing a huge increase in energy security from the 1970s, and effectively making the continent independent of the Middle East. Add in perhaps 1 million barrels per day from Mexico, growing exports from Brazil, and a modest recovery from battered Venezuela, and the Western Hemisphere becomes a net exporter of oil, just as we are of food. The implications are vast.

DrJandMrK.com