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Page added on January 4, 2015
Great Expectations: Revisiting Peak Oil
Crude oil supply expectations have changed over the last twenty years. In the late 1990s, the idea of “peak oil” was gaining popularity. The theory was presented by M. King Hubbert in the 1950s and popularized in the last quarter of the 20th century. Working as a geologist for Shell, he predicted US oil production would peak in the 1970s and then decline steadily.
Until recently, it appeared Hubbert was right. Production in the US did peak in the early 1970s and started a three decade decline…a sunset industry indeed. The peak oil theory is based on the premise that the amount of oil under the ground in any geographic region is finite. As resources are produced, pressure in the reservoir decreases, produced volumes follow a skewed bell-shaped curve, and the resource is ultimately depleted. Artificial lift technologies and other secondary recovery methods are used to extend the life of a particular well, but ultimately fields deplete and wells are plugged . . . the end.
What the theory did not take into account was the technological innovation of horizontal drilling combined with the 60-year-old technology of hydraulic fracturing to tap into shale resources that were previously uneconomic to exploit. We always knew shale formations existed and could be exploited, but until the last 10 years it was not technologically or economically viable. Higher commodity prices have made the application of advanced recovery technology viable, thus revolutionizing the industry. Since the mid-2000s, US crude oil production is up 60% and crude oil imports are down 20%.
A technology called 3-D seismic imaging has helped map the earth below the surface. Seismic data is collected and mapped by sending sound waves into the ground that reflect off of different rock layers. Some argue the “shale revolution” is temporary in nature due to the high cost to produce from such resources and the sharp decline production profile. They argue it is simply creating a second peak in production, only to return to its inevitable decline.
Another thought is that we will see “peak consumption” before we see “peak oil.” The introduction of LNG, CNG, etc. into the market could turn more and more consumers away from oil. While oil has long dominated the transportation market, if an alternative fuel comes along that burns cleaner and is just as easy to access, oil’s days could be numbered.
This brings us to the concept of recoverable resources. Technically recoverable resources include all the oil and gas that can be recovered based on current technology and knowledge of the geology. As technology advances and as we learn more about the rock, this category can expand. Economically recoverable resources are a subset of technically recoverable resources that can be produced at a profit given the current price environment. As prices move up, this subset expands, and as prices move down, it contracts. Typically the capital cost to drill and operate in a particular play moves down over time as operators gain efficiency, which expands the volume of economically recoverable resources. Commodity prices and capital cost thus work together to determine how fast and to what extent resources are developed.
The US Energy Information Administration (“EIA”) estimates the US has 223 billion barrels of technically recoverable resources. Of our recoverable resources, 25 billion is “proved reserves.” Proved reserves are the most certain category within recoverable resources that can be produced under current economic conditions. This category expands as new wells are drilled and contracts as existing wells are produced. It also expands or contracts as commodity prices change. This is the category that is typically reported by public companies and filed with the SEC.
Peak oil is a logical theory, but it ignores the pace of technological innovation which can extend the life of our known recoverable resources and/or discover new recoverable resources. We have known about the shale resource plays for a long time, but technology had not progressed to a point where we were able to economically produce hydrocarbons from those plays. That has changed. Some estimates now have US crude oil production surpassing the 1970 peak over the next decade. The truth is no one knows. Whether that estimate turns out to be accurate is a function of technology, resource recoverability, and price. No one can accurately forecast future technology and prices, and resource recoverability is largely a function of technology. In all likelihood, there may well be a “peak oil” point sometime in the future. We see tremendous investment opportunity in oil production, and we will continue to capitalize on it for the foreseeable future.
34 Comments on "Great Expectations: Revisiting Peak Oil"
penury on Sun, 4th Jan 2015 10:06 am
It is very comforting to me to realize that there is not a problem with finite resources as long as technology continues to improve/ I guess I will go watch football and let the people so much smarter than me, just continue to produce copious quantities of whatever we nee forever. Happy days are indeed here again/
ghung on Sun, 4th Jan 2015 10:32 am
Cute little graphic; “Stylized representation of oil and natural gas resource categorizations (not to scale)”
….but it’s scale that matters, and rates of production. Assuming that current, or higher, rates of production will be economically viable makes an ass of you; not me. I’m convinced that a return to $100 oil will result in people making other arrangements, or that the amount of economically recoverable oil well below that price is limited; won’t be providing the overall utility needed for growth.
No growth => no credit => not much oil.
Kenz300 on Sun, 4th Jan 2015 11:10 am
Depletion continues……..
yoananda on Sun, 4th Jan 2015 11:13 am
@penury
did you read the article carefully, or did you read it while watching a football match ?
What don’t you understand in the sentence “The truth is no one knows.” ?
Does it mean to you “unlimited ressources and TV Show” ?
Nigel on Sun, 4th Jan 2015 11:17 am
Peak irony?
DMyers on Sun, 4th Jan 2015 11:36 am
For the most part, this is an accurate statement of circumstances, presented with the obligatory homage to technology. To the extent there is speculation involved, such as EUR, the article supports continuing technological enhancement.
As another iteration of the party line, it is interesting to note the emergence of the latest version of the party line.
In essence, there is now a recognition of peak oil, but as having been pushed into the future. Taking the question of whether there may be a new, higher, peak in the US, the following language summarizes the new insider position.
“The truth is no one knows. Whether that estimate turns out to be accurate is a function of technology, resource recoverability, and price. No one can accurately forecast future technology and prices, and resource recoverability is largely a function of technology. In all likelihood, there may well be a “peak oil” point sometime in the future.” [quoted from article]
There you have it. Peak oil is a now, officially, a future possibility, but that depends……..
J-Gav on Sun, 4th Jan 2015 12:12 pm
True, no-one knows how long this farce can be dragged out. Still, my firm belief that there will yet be some significant technological advances in this field or that field does not change the fact that the capital and resources necessary to scale up said advances are very likely to come up short on this finite planet of ours.
Which almost leads me to give a “stylized representation” of my hind quarters to the author of this article.
Sugar Seam on Sun, 4th Jan 2015 12:36 pm
and, of course, no mention of the consumer’s capacity to afford the elevated price required in the first place.
Northwest Resident on Sun, 4th Jan 2015 12:38 pm
Here is an article touting some unknown and as yet undeveloped/unproven technology that will save us from Peak Oil, giving shale oil extraction technology as an example, while ignoring that despite all kinds of “technological improvements” in shale oil extraction it always was and remains to this day a completely unviable extraction business due to all the reasons that have been discussed endlessly on this forum and elsewhere.
But I like the optimism — unrealistic though it may be.
MSN Fanboy on Sun, 4th Jan 2015 12:45 pm
The theory didn’t take into account price.
Peak oil by price lol
Davy on Sun, 4th Jan 2015 2:52 pm
Technology will be important in the descent but it will not be the technology of today as far as the more complexity the better attitude. The key will be simplicity, reliability, low energy effectiveness as a few words of description.
I picture technology like we saw in the 40’s returning. The technology of that era had complexity but limited to mechanical over digital. Connectivity will diminish greatly with economic abandonment and grid unreliability. Let’s face it once energy intensity is rationed whether voluntary or involuntary complexity will follow.
Perk Earl on Sun, 4th Jan 2015 3:05 pm
So let me get this straight; oil extraction plateaus in 05, with non-conventional, including LTO getting ratcheted up via super low interest loans and an over $100 dollar oil price.
Then when US QE ends (this past Oct.), the value of the dollar goes up, which reduces value of other currencies including emerging market currencies, so oil priced in dollars goes way up causing reduced demand in those countries and the price drops, which will reduce incentive to go after LTO, but somehow in spite of these events ‘Peak Oil Theory’ (called Theory even though all finite resources being extracted have a peak – that’s math, logic and geology) is rejected at the hoop due to fracturing technology which has been around for decades.
Ok, sure now I’ve got it. In other words be filled with joy at our exceptionalism in overcoming limits to a finite resource and our obviously infinite time to enjoy BAU with no worries (to the masses that soak up this propaganda dribble).
strummer on Sun, 4th Jan 2015 3:05 pm
“Until recently, it appeared Hubbert was right. Production in the US did peak in the early 1970s and started a three decade decline”
Even the graph right below this sentence shows that this is not true. Production was rising for a whole decade from the late 70s until the late 80s.
shortonoil on Sun, 4th Jan 2015 3:28 pm
The peak oil theory is based on the premise that the amount of oil under the ground in any geographic region is finite.
There is also a theory that the sun will rise tomorrow. Of course it is just a theory!
Articles like this work by first insulting your intelligence. They piss the reader off sufficiently so they fail to read the rest of it carefully enough to pick up the incongruities it is based on! Such as shale came about because of advances in technology. The technology behind shale, such as horizontal drilling, has been around for a coons age. What brought shale into play was ZIRP, and massive unbacked credit formation that could pay for $100 oil. Added to the gullibility of a few pension fund managers, piling up a $trillion in new debt that can never be repaid, was a no brainier.
there may well be a “peak oil” point sometime in the future
What do you call fivestates.com authors with an IQ of a 140? Answer: a tribe!
Rodster on Sun, 4th Jan 2015 3:40 pm
“What brought shale into play was ZIRP, and massive unbacked credit formation that could pay for $100 oil.”
Ding..ding..ding, we have our winner !
GregT on Sun, 4th Jan 2015 3:45 pm
“Hubbert’s 1956 production curves depended on geological estimates of ultimate recoverable oil resources, but he was dissatisfied by the uncertainty this introduced, given the various estimates ranging from 110 billion to 590 billion barrels for the US. Starting in his 1962 publication, he made his calculations, including that of ultimate recovery, based only on mathematical analysis of production rates, proved reserves, and new discoveries, independent of any geological estimates of future discoveries. He concluded that the ultimate recoverable oil resource of the contiguous 48 states was 170 billion barrels, with a production peak in 1966 or 1967. He considered that because his model incorporated past technical advances, that any future advances would occur at the same rate, and were also incorporated.[8] Hubbert continued to defend his calculation of 170 billion barrels in his publications of 1965 and 1967, although by 1967 he had moved the peak forward slightly, to 1968 or 1969.”
Hubbert did not include Alaskan North slope oil in his predictions.
http://en.wikipedia.org/wiki/Hubbert_peak_theory
Speculawyer on Sun, 4th Jan 2015 3:49 pm
I think a lot of people completely misinterpret the USA peak in the 1970’s. It is not that the USA ran low on oil back then, it is just that we ran out of relatively cheap to extract oil such that it became much cheaper to import conventional oil from land-based mid-East wells that were just spewing out lots of really cheap.
As anyone with a clue knows, the main reason for the recent spike up in USA oil production is because $100+/barrel oil made the tight oil economically viable, so fracking commenced. As Rockman often points out, neither fracking nor horizontal drilling are new technologies. (However, I’m sure there have been many improvements created in the last 10 years.)
Now without the >$100/barrel oil, the USA fracking will slow down. And we’ll go back to importing more oil as long as their prices are lower. And we’ll ramp the fracking back up as prices go higher.
GregT on Sun, 4th Jan 2015 3:57 pm
Spec,
Our economies do not run on $100bbl+ oil. Conventional oil is what fuelled economic growth. Conventional oil peaked in the US in the 70s.
As anyone with a clue knows, high oil prices have lead to economic contraction, societal decay, financial bubbles, and mountains of debt.
Bob Owens on Sun, 4th Jan 2015 6:29 pm
The $100 prices of the last 5 years have finally worked their way through the economy, causing damage all along the way. The economy finally couldn’t take it and we have the price collapse of oil. The world is in recession, demand is down and deflation is here. It took 5 years for high prices to do their damage and it will probably take the next 5 years of low prices to do its damage. Think out of work oil drillers, worthless bonds, sinking wages. Rising levels of chaos will be the cherry on top of this mud pie.
Rodster on Sun, 4th Jan 2015 6:41 pm
“The world is in ‘DEPRESSION’, demand is down and deflation is here.”
There fixed for ya. It all went to hell after 2008 and we have not recovered. If it weren’t for Helicopter Ben we would have said bye bye to the industrial revolution.
Makati1 on Sun, 4th Jan 2015 6:48 pm
The Age of Oil will last until the next big financial crash, no matter how much is in the ground or recoverable. The ability to consume depends on the ability to pay for the recovery, refining, delivery, etc. When that ability to buy is gone, oil will be just another useful resource for special applications, nothing more. There will be no reset to a level anywhere near today’s consumption. Wait and see.
Newfie on Sun, 4th Jan 2015 7:48 pm
“The peak oil theory is based on the premise that the amount of oil under the ground in any geographic region is finite.”
You mean the amount of oil under ground in any region may not be finite ? It might be infinite ? Wow! I’m going to buy a V-12 Hummer and drive like there’s no tomorrow. Wheeeeeee!
Harquebus on Sun, 4th Jan 2015 10:03 pm
Peak oil is not a theory. It is an observation and it doesn’t have to be a peak, it can also be an undulating plateau. Either way, decline is inevitable and with growing populations and the pursuit of economic growth continuing unabated, the eventual decline will have far more serious consequences in the future than if the decline were to undeniably start today.
Perk Earl on Mon, 5th Jan 2015 12:19 am
http://www.bloomberg.com/energy/
I suggested In a few posts back about a week that oil prices had stabilized at about 55 for WTI & 60 for Brent. So much for that – ck. out the latest oil prices at the link above.
WTI –1.08 to 51.61
Brent –.90 to 55.52
Then take a look at what’s happening in Venezuela care of lower oil prices – hyperinflation! That’s the 3rd country in the past couple of weeks zerohedge has reported on having hyperinflation. First was a city in Russia, then one in the Balkens and now one in South America.
http://www.zerohedge.com/news/2015-01-04/now-theres-not-even-soap-maduro-heads-china-save-socialist-utopia-venezuela
Social media is awash with striking images of #EmptyShelvesInVenezuela (#AnaquelesVaciosEnVenezuela) as the evaporation of basic human staples such as toilet paper has now been hyperinflated to total chaos at warehouses and supermarkets. As President Maduro decries the loss of $100 oil “stability”, vowing to return oil prices to their rightful places (and heads to China for help), lines reach for miles for milk and soap… and the people defy governmental bans on photographing empty market shelves… “We couldn’t find shampoo, so we washed our hair with soap. Now there’s not even soap.”
Perk Earl on Mon, 5th Jan 2015 4:20 am
Looks like this game of waiting to see which oil producer blinks first and loses market share, is taking on a new dimension with ‘hedging’.
http://in.reuters.com/article/2015/01/05/oil-hedging-idINL1N0UD0P920150105
ANALYSIS-Revamped US oil hedges may test OPEC’s patience
Jan 5 (Reuters) – As a war of nerves between U.S. shale producers and Gulf powerhouses intensifies, OPEC’s biggest members are counting down the months until their upstart rivals lose the one thing shielding them from crashing oil prices – hedges.
They may need much more patience than they reckon, however, because those hedges are a moving target. Rather than wait for their price insurance to run out, many companies are racing to revamp their policies, cashing in well-placed hedges to increase the number of future barrels hedged, according to industry consultants, bankers and analysts familiar with the deals.
Davy on Mon, 5th Jan 2015 5:02 am
Perk, sadly, Venezuela will be a canary in the coal mine for the rest of the world. What is happening in Venezuela is an economic disequilibrium. Now imagine these hyperinflation issues compounded with oil and food shortages. We know oil shortages will include food shortages. We then start seeing a perfect doom storm. We are moving towards a period where the global economic storms will include food and fuel shortages.
When we acknowledge Short’s thesis of declining economic value of oil to the economy along with what is already apparent with conventional volumetric depletion of oil we see the beginning indications of global oil shortages. These shortages are going to be economic and quantitative in nature. The economic is the natural progression of the depletion of energy value to the economy. We know this oil economic value shortage is part of the thermodynamic principals of energy in nature at work. The quantitative is going to come from two sources an actual volume peak and the economies demand peak. Both of these peaks are close at hand and can be easily debated but not dismissed. Even if the economy were healthy and able to fully deliver oil economically there is still the issue of a serious depletion effect going on in the traditional large conventional fields with their reduction of high quality crude.
The new peak oil dynamic is peak demand from a faltering economy. The economy is now faltering for a variety of reasons. We know limits of growth coupled with diminishing returns are affecting a broad based negative economic condition. Then we have the effects of financial repression, corruption, manipulation, and disregard of generally accepted laws and practices. Probably most troubling is the excessive debt taken on in a very short time coupled with a basic population overshoot appearing economically with society wide unfunded liabilities. These wealth transfer conditions are destroying the global social fabric.
The faltering demand side of the equations appears to be kicking in quicker than the depletion of quantity and quality of oil on the geologic side. IOW the economic engine is sputtering. This is resulting in some dysfunctional economic conditions on the POD side. We appear to have an economic oil glut now. Many of the economic conditions point to demand being the culprit. The numbers do not show huge irregularities of supply that would by past measurements indicate a supply issue driving down prices.
What will be most interesting is to see the price rebound environment coming up. We suspect price will stabilize and rebound but how much and in what economic environment. We may find ourselves in a vicious cycle of a bumpy descent down where the economy and the energy supply are rocking back and forth down. This will be the end of growth and the end of a high oil price in a normal economic sense because who knows what hyperinflation could bring.
This will be the end my friends of normal BAU life as we know it. All indications are we are on a bumpy descent of economic productivity, the economic value of oil, and possibly the near term classic peak oil production. This is a grave event and most like will be the trigger to crisis like what we currently see in Venezuela. What we see in Venezuela will be a mirror of the global soon with the addition of food and fuel shortages. These three conditions of food shortages, fuel shortages, and hyperinflation will quickly lead to a loss of confidence end of globalism and modern industrial man. If we are lucky we can manage, adjust, and mitigate the bumpy descent to a degree that we can soft land and reboot with some civilization left.
Dredd on Mon, 5th Jan 2015 6:21 am
When the use of a finite resource continues to increase the only way to convert it into a non-finite resource is to increase propaganda.
rockman on Mon, 5th Jan 2015 6:51 am
A lot of good comments as usual. But I always like to correct statements that Hubbert did not make. I suspect most of those misstatements come from folks who actually never studied his analysis of US production: “The peak oil theory is based on the premise that the amount of oil under the ground in any geographic region is finite.” Hubbert’s analysis did not cover a “geographic region”. He clearly points out that his analysis is only of those trends that had been developed to date. The “peak” he predicted was only for those trends…not the Deep Water GOM and the Eagle Ford Shale. His statistical analysis was applied only to those conventional trends which had been fairly well developed. Which is a big reason why his analysis was correct. Not to take anything away from his effort but consider the difficulty folks have today estimating the URR of various new plays such as the EFS. Now consider doing so after 70% or 80% of the potential EFS wells have been drilled. Obviously a lot easier. Same was true for his analysis: most of the major fields in the trends he studied had been discovered 20 to 40 years before his estimate of THEIR peak production rate.
And guess what: his predictions are just as correct today as it was back then. Today production from those trends average less than 10 bopd per well. And while the EFS and DW GOM have much higher production averages those trends were not a part of the statistical population Hubbert focused upon. And some years down the road some new “Hubbert” will do likewise for the EFS and DW GOM once the majority of those wells have been drilled.
shortonoil on Mon, 5th Jan 2015 8:37 am
“We may find ourselves in a vicious cycle of a bumpy descent down where the economy and the energy supply are rocking back and forth down.”
Excellent summary Davy.
The recent price collapse did not surprise us at all. It was the magnitude of that descent that completely caught us off guard. We believe that we have a very good handle on the per unit energy decline rate of petroleum to the general economy. It is presently about 3% per year. That should have translated into a decline in price of about 25%; instead we got 50%!
What we are witnessing may be analogous to a suspension bridge swaying in the wind. Each new gust of wind drives the bridge a little higher until the forces on it cancel out. The bridge comes to its maximum height, and then begins to swing back. The bridge is the economy, and depletion is the ever present wind. Each swing of the bridge stresses its structural members, produces metal fatigue, and stretches its cables. If it continues indefinitely the bridge will fall into the chasm below. If our bridge has been left in disrepair; if rust has gnawed at its bolts, and rivets, it will certainly fail that much sooner.
Then we have the effects of financial repression, corruption, manipulation, and disregard of generally accepted laws and practices.
Venezuela has been a pit of corruption, and dictatorial misuse for a very long time. It is not surprising that it is among the first to fail from the impact of petroleum depletion. In recent decades we have seen similar corruption creep into our own system. Perhaps not as blatant as Venezuela, but non the less odious. It is like rust forming on the beams, and cables of our bridge. There is no guarantee that our bridge will withstand the winds of depletion, but if we scrap it, and paint it, and strengthen its weak points we will certainly improve the odds that it will!
http://www.thehillsgroup.org/
agramante on Mon, 5th Jan 2015 9:22 am
BTW, Perk–it’s always called a “theory”. Hell, it’s still the theory of gravity, and middle school students still study the theory of geometry. A theory refers to an idea, or a set of ideas–idea/s rigorously demonstrated by generations of testing and proof (in the case of geometry), but still ideas. For something to graduate from “hypothesis” to “theory” means it’s become an established part of our thinking.
Davy on Mon, 5th Jan 2015 10:36 am
AP, just wait until the theory becomes hands-on and personal. That’s when it will be a theory that bites them in the ass when you are not looking. These folks that are debating and proselytizing propaganda against PO will be in for one of those come-to-Jesus moments when they are cold, stranded, and hungry.
Perk Earl on Mon, 5th Jan 2015 7:23 pm
agramante, when people who assert to peak oil discuss the subject it’s not referred to as a Theory. Theory can mean a set of ideas to explain something proven or not proven. It’s one of those terms that gets used both ways. The hypothesis is the foundation for a theory. It’s usually stated as a definition for the basis of the theory.
Many theories down through time have been proven wrong. For example theoretically based on the equation E=MC2 when the energy is gone the mass is gone (as a critical mass supernovae compresses) it is transitions into a singularity, a black hole with zero volume and infinite density. However, that theory has never been proven correct. Some day it might get tested, in fact they are now trying to detect a black hole’s shadow and test those results against Einstein’s equation for the signature of that shadow.
Perk Earl on Mon, 5th Jan 2015 7:33 pm
Davy, when they are cold, stranded, and hungry, they will say, “That damned peak oil theory! Jesus, I can’t believe it turned out to be correct.” lol
Davy on Tue, 6th Jan 2015 6:05 am
Perk, and us doomers, when we are cold, stranded and hungry we will be saying “damn it sucks being right”!! At least us doomers and preppers will be less cold and hungry…. Maybe??. I am not sure about less stranded I would clarify that as being more adjusted to a smaller world.
Personally folks I don’t care for trips anymore. I just got back from a wonderful holiday but then I am behind the eight ball with all my projects back at the doomsted. Coming back from a trip in winter there are cold issues that are dangerous if one is gone. I had two heater fail because of an electric blink. They were the type that don’t come back on if power is interrupted. I was just lucky I got back when I did or pipe damage may have occurred.
Further instead of being a carbon whore I should have been here burning wood instead of jet fuel and heating the doomstead with electricity. Shame on you Davy! I am serious. I felt obligated to be with family. WTF, that sucks choose gilt or gilt??? Carbon whore gilt or family neglect gilt. At least I preached and tried to educate but with little results.
This points to an important aspect of complexity. We will have to shrink our lives and shrink automated and connected complexity. I needed to be here to monitor the heating in very cold weather instead I am on a sunny beach many miles away. We are going to have to get back to local and participatory and less automation and remote living. IMA using automated and connected devices that are throw away. Talk about energy intensive and lacking resilience. We went all in for this lifestyle now it will be all out back to a reality of sustainability and resilience.
We can adjust to lower complexity by less connectivity and more personal involvement. In our initial descent this will mean back to robust staffing. In our personal space this will be remaining local. In a larger sense like a more complex operation we need less sensors and more people involvement. Less face it in almost every vital endeavor we are going to have to beef up staffing and lower automation, complexity, and energy intensity.
Human and animal power will have to come back. Mechanical utilization of wind, water, and sunshine will need to return. These are the renewables with a future. The whole systematic organization and energy input aspect of our human ecosystem must devolve from complexity and evolve to greater value.
I would call it evolve because personally I think it is an action of greater value. Greater value can be found in resilience, sustainability and less energy intensity. We are talking about getting greater value from less. This will not be the current dogma of efficiency i.e. more with less. It will be more actual value from sustainability, resilience and lower energy intensity. If we shoot for less we have the opportunity to have more value. We have the opportunity to actually be a participant in an important process of living and supporting instead of comfort and thrill seeking.
At this point we should not reject completely the level modern level of complexity in systematic practices and physical devices but we should practice a salvage and a renovation into a hybrid practice of new and old. We have a huge energy investment in our modern world lets try to salvage what we can so that is not a complete loss.