Peak Oil is You
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Page added on February 21, 2014
Peak Oil: Higher Prices
It is unfortunate, however, that we cannot look at the real problem. Unless we can understand the problem as it really is, it is impossible to find solutions that might actually be helpful. [1]
MIXED MESSAGES
The message behind messages like that one aren’t usually anyone’s first choice for contemplation, planning, or doing. Happier yarns about energy abundance are certainly more appealing. Reality being what it is, however, we continue to ignore that to our longer-term detriment.
“Appealing” has a limited lifespan, and when the misleading half-truths are what most citizens hear most of the time, that timer will wind down sooner than we’re prepared for. That is definitely not a good message….
The bottom line is: If we want oil, we are going to need high prices. That’s what peak oil is all about – progressively higher prices that are going to allow us to continue to find new sources of oil.
We aren’t running out of oil. We are running out of the easiest oil to extract.
With advanced (and more expensive) drilling techniques, oil prices may stay in this $90 to $110 range for a decade as we continue to exploit these new sources of oil that have opened up.
But once those sources enter a production decline (and they will), then the price of oil will likely start to move up again, until another new source of oil is opened up by even higher prices… and we enter into a new stage of ‘peak oil.’
So if you’re worried about your oil stock’s share price dropping with the price of oil, I don’t think you have much to worry about. In my estimation, we’re not going to see oil prices drop drastically from where they are now.
The fact is we need high prices to spur innovation and oil discovery. [2]
THE OTHER SIDE OF THAT STORY
As is too often the case with communications such as this arguably well-intentioned one (the author does acknowledge that peak oil is an issue), the other, detailed side of the story tends to find its way to the cutting room floor. Facts continue to screw up a narrative based only very loosely on all of the information.
In a world with limits, there are feedback loops that cause high oil prices to lead to lower wages and more unemployment in oil importing countries. Thus ‘demand’ can’t keep rising, because workers can’t afford the higher oil prices. Oil prices stagnate at a level that is too low to maintain adequate investment. High oil prices also feed back into slower economic growth and a need for ultra-low interest rates to raise demand for high-priced goods such as cars and homes. [3]
The other side of that “we need high prices” story is that someone—you and me, specifically—is paying those high prices. And in a world where all but a very few families are making spending decisions every day as to priorities, paying higher prices for energy needs has its own limited shelf life. As I and others have stated repeatedly, when decisions are made that food, clothing, shelter are more pressing budgetary priorities than another tankful of gas this week, those high prices oil industries and investors are counting on stop working.
It’s important to realize that all the Happy Talk about the marvels of industrial ingenuity and technology likewise have a limited appeal. For all of the vast, massive, colossal (take your pick) “reserves” that keep getting added to the ledger, they will remain numbers on a ledger and nothing more if we aren’t paying the prices they need to extract and produce those now harder-to-extract-and-produce, more expensive, less energy efficient unconventional resources.
As the author of the second quote above noted in that same article:
Virtually none of today’s energy resources can be produced profitably for less than $60 per barrel….
So how does this play out: the industry continues to insist it needs higher prices to supply us all with the energy we need while we lowly consumers decide just as vigorously that we aren’t/can’t/won’t pay those higher prices. Stalemate.
Who “wins”? Perhaps we ought to give some thought to how this scenario does in fact play out, as it will. A good idea to have some strategies in place before we get to that “Uh-oh!” moment?
15 Comments on "Peak Oil: Higher Prices"
rockman on Fri, 21st Feb 2014 12:40 pm
“Virtually none of today’s energy resources can be produced profitably for less than $60 per barrel….”. I believe I understand what he’s trying to say. But he just stated it very poorly. A very significant portion of global oil production can be produced very profitably for much less than $60/bbl. But developing NEW production does costs a good bit more.
But otherwise an adequate job IMHO of highlighting the obvious feedback loops between prices, demand and production rates.
Davy, Hermann, MO on Fri, 21st Feb 2014 1:12 pm
@rock – agreed, although many of the sources in that $60 range are Nationals who face the steady pressure of budget deficits caused by political/social needs. Many of the OPEC members fit in this group. I also want to comment on the price thing. In the realm of relativity of prices we are where price will remain high relative to the economy. What is the difference with very high prices with inflation or low prices with deflation? One, you have lots of paper money paying the higher price the other much less money paying the lower price. Yet, from the all-important capex point of view for the unconventional production needs, price will have to stay in the range of industry roi to satisfy investment requirements. What is commented on in this article is the “goldilocks” range. The other possibility is government intervention in production. I have not seen articles on this or other non-pleasantries like martial law. If you move up the ladder of understanding to limits to growth and all the consequences for the vitals to our support system then we need to start addressing these issues. I remember the Hirsh report and articles after that discussing strategies for shortages. If I remember correctly Hirsh and two other authors addressed a plan on how to distribute transportation fuel products. Gas and electric may be easier to ration. The one thing to remember in these scenarios is production will drop. It is well proven that a command and control focused E&P cannot match a market based approach. The economy will also drop again curtailing resources for all activities. At this point then one needs to point out that our system has become brittle, do to diminishing returns of limits of growth in a complex interconnected global economic system. I know you guys maybe get tired of hearing this theory but all the other variable fit into it. Do we not live local and is not our local support system reliant to a high degree on the global system? We must start addressing these decent scenarios instead of all the lower down the ladder scenarios of food, water, energy, turmoil, decaying social fabric, climate instability. All these contagions or tipping points are pressuring our support system to break to a new equilibrium. This is all theory so what does it mean in the real world. Is it correction, contraction or collapse? In the end what matter to us? I believe it is our local support system.
ghung on Fri, 21st Feb 2014 1:35 pm
Sounds like Steve’s ‘Triangle of Doom’. A couple of things about the cheaper sources of oil that Rockman mentions: Those producers certainty aren’t going to dump that oil on the market at $30, so it’s the same thing to consumers… and production declines in those cheaper-to-produce plays means they’ll need to be replaced with more-expensive-to-produce plays in due time. Ten BPD stripper wells aren’t going to fuel global growth. It doesn’t take a genius to figure out the trend, and the details won’t matter much in the long run.
Funny that some old ranchers watching their stripper wells from their porch, slowly, surely pumping a few barrels each day are the ones likely to end up on top in this. “Pass me another chicken wang Darlin’, and a cold Lone Star would be nice.”
rockman on Fri, 21st Feb 2014 2:23 pm
ghung – So true about those old strippers and even older operators. I’m about to start discussing a sublease from one of those folks. He has 5 wells holding his lease that are making a total of 8 bopd along with 600 bbls of water/day. That might not sound like much but he’s probably netting around $175,000/year. Not a bad pay day considering it probably doesn’t require more than 3 hours a day on average to tend to those wells. Better than working as a Walmart greeter. So yes: I expect some tough negotiations.
And as you note stripper wells account for nearly 20% of all U.S. oil production. We’ve gotten a nice boost from the fractured shales but we all understand their huge decline rates. Strippers OTOH typically decline less than 1% per…if at all. Their life span is controlled by the price of oil and mechanical problems. An operator could keep making money on a 1 bopd wells for years. Unless something breaks and it costs too much to repair. Underneath that ramp up in US oil production are all those old strippers and heritage wells. If the unconventional boom comes to an end for whatever reason we’ll still have that very slowly declining production base. A base that will keep flowing at oil prices under $30/bbl. Which is why the “running off a cliff” was never a real possibility IMHO. But the dynamic has changed somewhat. With the high rate unconventionals adding to the mix we could see a very sharp and quick drop off if prices fall a good bit. But not a cliff…the old wells will still keep producing. As slowly as ever but still producing.
Northwest Resident on Fri, 21st Feb 2014 3:19 pm
If I was one of those old ranchers sitting on the porch watching my stripper well slowly but surely produce a few barrels of oil per day, I’d be wondering at what point in the future will the government or some marauding band of Mad Max type goons be coming to take control of it.
ghung on Fri, 21st Feb 2014 3:30 pm
@Rock – “He has 5 wells holding his lease that are making a total of 8 bopd along with 600 bbls of water/day.”
Is that water good for anything? It may be worth more than the oil the way things are going.
ghung on Fri, 21st Feb 2014 3:37 pm
@NR – Nah, you have to understand the mindset of most of these folks. Reminds me of the (Jim Stafford) song, “The Wildwood Weed”:
They dug and they burned
They burned and they dug
‘Til they killed all our pretty little weeds.
When they drove off, we just smiled and waved,
Sittin’ there on that sack of seeds.
Davy, Hermann, MO on Fri, 21st Feb 2014 4:22 pm
@ghung – triangle of doom – I love when you guys tickle my brain
rockman on Fri, 21st Feb 2014 4:38 pm
NR – “…some marauding band of Mad Max type goons be coming to take control of it.” Are you aware that if Texas were counted as a separately country we would be in the top 5 armed camps on the planet? If you think they would sit back and watch some take their oil go poach some deer on their property and see how they react. LOL.
rockman on Fri, 21st Feb 2014 4:41 pm
ghung – No. Unfortunately salt water. But they paid out their disposal well long ago. So just a little bit of energy to get rid of it. These wells are the classic water wells with a bit of brown scum.
Northwest Resident on Fri, 21st Feb 2014 5:24 pm
rockman — I didn’t say the government or Mad Max types would actually be able to take control of the ranchers’ oil — just that if I was a rancher, that’s what I would be thinking about (along with how I’m going to booby-trap, position fire power, set land mines and otherwise ambush the fools that are stupid enough to try..).
Davy, Hermann, MO on Fri, 21st Feb 2014 5:31 pm
Those boys in Texas like their long range big caliber rifles with big scopes for those big distances. I know some boys around here that relish the day when the Mad Max folks come and visit. These boys will go out Fox huntin. These boys around here know the country and the people. These boys around here are not scared either
Northwest Resident on Fri, 21st Feb 2014 6:26 pm
Davy, rockman — Let’s hope it doesn’t come down to that. If it does, then Makati1’s vision of future America is likely to come true — one big massive gun battle until there’s nobody left standing or we’re all out of ammo — whichever comes first.
rockman on Fri, 21st Feb 2014 7:13 pm
NR – A scary thought for sure but I’ve crossed paths with more than a few would-be Rambo’s in Texas who said they were itching for a firefight with whomever. Amateurs for sure…lots of big talk. But still a little scary. Just one reason I tended to hunt by myself. LOL.
It’s difficult for me to imagine it getting that bad in the US. But if it ever does I won’t be around. Just like getting taken out by Al-Qaeda or a Mad Max: better chance of getting it from a drunk driver on Saturday night. IOW doesn’t keep me awake at night. LOL
Northwest Resident on Fri, 21st Feb 2014 7:30 pm
It is difficult for me to imagine it that bad either, rockman. As I’ve posted quite a few times on this site, I am about 100% positive that if/when that big bad-ass collapse happens, the American military and Homeland Security in their armored vehicles and local law enforcement agencies with their hand-me-down military equipment will be ON THE SPOT to suppress and eliminate any major disruptions to law and order. The minor disruptions and incidents we’ll just have to handle ourselves, same as usual. I hope you stick around long enough to catch at least the first act of what promises to be a very interesting show, rockman, and I hope the same for myself. I’ve got a bunch of “I told you so” flyers all printed up, and I’m looking forward to handing them out.