Checking In On Peak Oil

In last week’s column, The Case of the Missing Propane, I explained how the widespread use of hydraulic fracturing (fracking) of shale oil deposits since 2008 has led to a 30% increase in the production of crude petroleum in the United States. While that statistic makes for snappy headlines, it is not particularly meaningful to the overall world oil supply or the phenomenon known as Peak Oil.

If you are not familiar with Peak Oil, I published a column in June of 2011 called Peak Oil in Five Paragraphs or Less. Here are the key points:

• Peak Oil refers to the time at which we reach the global maximum rate of oil production, which is followed by decades of declining rates of production.
• Due to oil’s pivotal role as a transportation fuel and (as I explained in Everything Comes from Oil) the key raw material for most consumer goods, the global economy can only grow if oil supply continues to grow.
• In order to keep producing more and more oil, you must keep discovering more and more and more. This is not possible. Eventually you are exhausting oil fields at a rate faster than the new ones can be discovered.
• The global peak for conventional oil sources occurred in approximately 2005, requiring us to turn to unconventional sources such as shale oil and oil sands. These sources are expensive to exploit and will not last for very long.
• The economic disruptions cause by the impending oil supply constraints will be very challenging for the global community.

The graph below was the key feature of Peak Oil in Five Paragraphs or Less. This graph is pivotal to understanding both the history and economics of the last century as well as the challenges coming in the next; everyone should be familiar with it. Its peaks and valleys tell stories as varied and interesting as the growth of suburbia in the U.S. and the role of Saudi Arabia in the post World War II era. But I never see this graph in the papers. It’s not hard to understand. As you can see from the bars, the peak year for global oil discovery occurred in 1965, the year before I was born, and has been generally declining ever since. Due to extraordinary efforts by the oil companies, the rate of production has yet to start declining, but as those old fields continue to be exhausted, it will.

Beginning in 2007, you see a small, but temporary, increase in “discoveries” which corresponds to shale oils such as the Bakken Shale in North Dakota. I put discoveries in quotations because shale oil deposits have been known about for decades but were simply not counted as petroleum reserves due to their low quality. The oil sands in Alberta, for which the Keystone XL pipeline is intended, fall into this same low-grade category.

Before I show you some additional graphs (I love graphs), we need a brief aside on definitions and sources. The data I use below is from the U.S. Energy Information Administration (EIA) and is, therefore, reliable for past data. Different sources define “oil” differently, which can cause confusion. Some, such as this column, restrict the definition of oil to crude petroleum – think gushers from old movies. Other sources add in liquids that are collected during natural gas refining – we discussed those last week – as well as biofuels, resulting in larger totals.

The graph below shows U.S. crude petroleum production in millions of barrels a day since 1980. From 1980 through 2008, there was a steady decline from 9 million to 5 million barrels a day. In 2008, fracking of shale oil began in earnest, which has increased U.S. petroleum production from a low of 5 million to 6.6 million barrels a day, an increase of 30%.

Extracting petroleum from shale formations is an expensive business. After you go through all the effort and expense to drill downward and then horizontally, and break up the rock below with high pressure fluids (fracking), the production from the well falls off by an average of 65% during the first year. Therefore, in order to keep production going, you’ve got to keep drilling and drilling and drilling. In 2011, 16,000 fracking wells were drilled in the U.S. In 2012, it was 19,000.

While doing the research for this column, I decided to have a look at the Bakken Shale Field formation, which spans the North Dakota-Montana border just south of Canada, on Google Earth. I could not get a nice looking picture for you, but it is somewhat fascinating to see. If you use the satellite map feature, follow the existing rural roads, then look for secondary dirt roads which lead to dirt rectangles. Each rectangle will contain a well with a pump on top, four tanks for collecting the oil, and some other equipment. You generally will not find any people or vehicles, because these units run automatically. As you pan around, you can find them by the hundreds.

The increase in petroleum production in the U.S. has not provided any meaningful relief from high gasoline prices, which remain steadfastly above $3.00 per gallon. There are two main reasons for this: petroleum is a global commodity (more on that below) and fracking is an expensive technique. Consider that in 2004, oil sold for about $40 per barrel. The break-even price for a barrel of oil produced from fracking is $80.

The graph below shows world crude petroleum production along with the same data I showed for the U.S. in the previous graph. As you can see, petroleum production in the U.S. is only a small fraction of the global total. Therefore, the 30% increase in U.S. production has only increased the global supply by two percent. A two percent increase in global supply, especially an expensive supply, is not sufficient to result in a reduction in U.S. fuel prices.

So where does this leave us? Overall global supply of petroleum is being maintained near 76 million barrels a day based on the extraordinary efforts to extract unconventional oils. Sometime between now and 2025, the supply will begin to decline and cause social and economic dislocations. As we continue to exploit the unconventional sources during this time, carbon dioxide concentration in the atmosphere will grow from 400 to 450 parts per million, causing even more dramatic changes in our weather patterns and challenging our ability produce enough food for eight billion people. Dealing with these parallel challenges will be the defining features of the 21 century.

chapelboro