Gail Tverberg: This Is The Beginning Of The End For Oil Production

With the recent collapse in the price of oil, Gail Tverberg, returns to discuss the likely impact on the US shale oil industry, as well as the global market for oil.

Gail is a professional actuary who applies classic risk assessment procedures to global resources: studying issues such as oil & natural gas depletion, water shortages, climate change, etc. These days, she writes at her website OurFiniteWorld.com.

While as an actuary, Gail is one to avoid hyperbole and the let the numbers speak, her analysis of the outlook for future oil production is nothing short of dire:

What we need is cheap energy. We need cheap, liquid oil. When it’s high-priced it really messes up the economy. We need oil to run our cars and to operate our trucks and such things, but it needs to be cheap. And it suddenly is today.

But, you have to be able to keep pulling it out at that same price. And the critical thing is, we can’t keep pulling it out at that price. What is going to happen, I’m afraid, is that once production goes down, we won’t be able to get it back up again.

There’s several reasons. One of them is that very low interest rates have been helping keep production up. Once you get your interest rates back up because there’s been a lot of failures, particularly in the shale industry, the costs will be higher. So, they can’t pump it out for the same price that they had it before. But, there’s also the issue that these old wells need to be produced continuously and they need continuous investment. If you cut that off, it’s going to be very hard to restart them. So, there will need to be an extra investment just to get it back online. Trying to do that becomes extremely difficult when the price is low. If it’s really an affordability issue, you’ve got a double hurdle then. Not only do you have to get the price up, but you have to get the price very high so you can get lots of investment dollars so you can kind of make up for lost time, besides everything else. As we know, it takes a long time to get new production online.

I think, too, that it gets to be even worse than that, because financial institutions have sold derivatives based on the assumption that things can kind of go along as normal. So, you start seeing very strange motions in terms of the rise of the dollar, the fall of the dollar, and a variety of other things besides just these oil price changes. Over time, what you’re going to get is a bunch of business failures. That’s going to come through these derivatives and it’s going to come through the financial system in a different way than just the oil price itself would. We have multiple impacts of these things, some of which are not obvious when you just first look at the story.

Suppose you have a derivatives problem. If you have a derivatives problem and you have to go back against depositors, your depositors are things like companies that are making payroll payments. So, the big danger is that these payroll funds will be taken in this process of taking the money away to try to get enough money to fund the derivatives problem. Or, they might not be derivatives problems. They might be other kinds of problems that are putting banks under.

If you start taking the money from the oil companies that they were going to use to pay their employees or if you take the money from electricity companies that they were going to use to buy coal or that they were going to use to pay their employees, you have a very bad effect on the economy, which has nothing to do with the shape of the oil depletion curve.

As I said, the big issue I see is an affordability issue. I don’t see oil prices bouncing back up again, or certainly not bouncing up very long, for very far. So, for oil production, this is basically the beginning of the end…what we’re seeing is the beginning of Peak Oil, basically. The oil production will actually permanently turn down at this point because we will not be able to get it back up, and because of all the financial situations coming along.

peak prosperity

25 Comments on "Gail Tverberg: This Is The Beginning Of The End For Oil Production"

Plantagenet on Sat, 17th Jan 2015 4:50 pm

The collapse in oil prices is due to a glut of oil. Oil production may indeed fall due to the current low prices, but there is no reason why oil production in the US can’t rise again if oil prices go back up and tight shales begin to be fracked again.

Plantagenet on Sat, 17th Jan 2015 4:50 pm

Plantagenet on Sat, 17th Jan 2015 4:51 pm

Ooopsies. Double post—sorry!

ghung on Sat, 17th Jan 2015 5:35 pm

All the King’s Horses, and all the King’s Men…..

antaris on Sat, 17th Jan 2015 5:38 pm

If we go to the EIA US field production graph taken from 1860 to almost present ( because it lags a few months). We then bypass the little blip caused by squeezing hydrocarbons from rock and just extrapolate the curve (actually fairly straight line) one can see production hits zero before 2040.
The end of oil production in The US is very near.

coffeeguyzz on Sat, 17th Jan 2015 5:40 pm

It’s OK, Plant.
No matter the spin, no matter the rationale, it is clear to all but the most zealous idealogue that the fall in the price of hydrocarbons is due almost exclusively to the amount currently supplied to the market.

Plantagenet on Sat, 17th Jan 2015 6:13 pm

Thx, coffeeguyzz

I appreciate your voice of reason. However, there are still some dim bulbs out there who continue to argue against the idea that the current drop in oilprices is related to the current oil glut.

marmico on Sat, 17th Jan 2015 6:16 pm

Gail is one to avoid hyperbole and the let the numbers speak

There is not a single number in the extracted piece. It’s nothing but word salad.

shortonoil on Sat, 17th Jan 2015 6:38 pm

Gail is correct. In 2012 the world’s petroleum production passed through a critical point:

http://www.thehillsgroup.org/depletion2_022.htm

It was the point where the consumer affordability curve, and the price curve crossed. From here on out the highest cost producers will be priced out of the market. Once shut-in the price will never again be high enough for them to restart.

World petroleum production is approaching the “dead state”. A thermodynamic condition where the energy to produce petroleum, and its products becomes equal to the energy content of the oil. Our calculations (shown in our 57 page report) places that date for the “average” barrel sometime between 2030 and 2035. After that, only a very small tail to the production curve will remain.

We are facing the most challenging transition that modern civilization has ever experienced. A world of declining oil availability will test the very fabric of society in ways previously unbeknownst to us!

http://www.thehillsgroup.org/

toolpush on Sat, 17th Jan 2015 7:40 pm

Short,

You make some interesting points, but there are some I do not understand.

“It was the point where the consumer affordability curve, and the price curve crossed.”

When the price of oil was $100/b, you say the consumer could not afford it, yet the US gasoline market still went out a bought large trucks as their preferred form of transport. I realize the US market has a fascination for these vehicles, but when the alternative was to buy a small car getting better than double the fuel economy, and therefore making the fuel price affordable, then we must have a suicidal society.
Normally pride goes before a fall, but the US car/truck buying market seems to be willing to take the fall in front of there pride.

marmico on Sat, 17th Jan 2015 8:13 pm

New vehicle buyers were ramping up light duty truck purchases before the crash in gasoline prices.

Makati1 on Sat, 17th Jan 2015 8:19 pm

Toolpush, it only proves the stupidity of the big truck buyers, not the oil/consumer situation. Short sums it up nicely and Gail is spot on. We are now in a new world, uncharted and wild.

marmico on Sat, 17th Jan 2015 9:05 pm

it only proves the stupidity of the big truck buyers

No. It proves that the 16+ million light duty vehicle buyers in 2014 are smarter in the aggregate than the affordability [demand]/cost [supply] models of Tverberg and Hill.

shallowsand on Sat, 17th Jan 2015 9:37 pm

Plant. It seems to me price collapse is a result of both supply rising more than expected in North America and demand growing at a slower rate than in previous years. Hard to say which is more of a cause but I think both are relevant.

Kenz300 on Sat, 17th Jan 2015 10:58 pm

Electric cars and trucks are the future……. They are cheaper to operate and do not need an oil change every 3000 miles or a gas station to fuel up.

It is time to end the oil monopoly on transportation fuels.

We can deal with the cause of Climate Change (fossil fuels) or we will deal with the impact………

Pope Francis’s edict on climate change will anger deniers and US churches | World news | The Guardian

http://www.theguardian.com/world/2014/dec/27/pope-francis-edict-climate-change-us-rightwing

DMyers on Sat, 17th Jan 2015 11:09 pm

To repeat my own opinion, as others seem to be doing with theirs: there ain’t no oil glut!

“We are now in a new world, uncharted and wild.” [Makati1 on Sat, 17th Jan 2015 8:19 pm] Mak, I’m going to have those words lettered onto a five by seven inch piece of poster board, frame it, and hang it on the kitchen wall, under the print of the old man offering a fervent prayer.

Gail makes an important point here, which is being largely avoided. Cutting back production introduces its own considerable expense, and reinstating that production at a later time will introduce an even greater expense. This understanding bolsters the argument that the Saudi choice not to cut production under current circumstances is a rational decision in its own best interest, with no other ulterior motives necessary.

Okay, so maybe we weren’t even talking about that, but there are many complications contributing to oil price instability on a trend of decline.

Shortonoil is still the point man on this quest to find transparency in the mechanism of oil pricing. Only the market’s sudden grasp of the growing presence of low quality – i.e., fifty dollar oil – in the system could have had such an explosive impact on prices.
The extent of the price decline has not reflected the corresponding variation in supply/demand dynamics. This calls for another explanation, or combination of explanations rather than the continued application of economic principles, insufficient to explain the current situation.

What short is telling us is the horrifying truth. We crossed the inflection point of doom for the world as we know it in, shazayum, 2012.

Joe D on Sat, 17th Jan 2015 11:23 pm

Pride cometh before a fall, pride goes before a fall, pride goeth before a fall, pride wenteth before a fall……..A person who is extremely proud of his or her abilities will often suffer a setback or failure, because he or she tends to be overconfident and to make errors of judgment.

toolpush….I think your example, is a good example of this.

Bandits on Sun, 18th Jan 2015 4:17 am

kenz electric cars are purchased as a second car. Families use their gas guzzling SUV for their day-to-day transport. No sucker buys a 50 mile distance vehicle to rely on.

For your information personal transport is the very least of humanities worries. Electric trucks are a figment of your imagination, for proof, stand on a motorway over-bridge, count how many trucks pass every hour………..
But also take note of the service vehicles, police, ambulance, fire, electrician, plumber, mowing, service repair, builder……all electric, you are such a stupid individual.

theedrich on Sun, 18th Jan 2015 5:17 am

My short summary of this important interview: Gail explained that “oil production is based on ‘zero-interest-rate policy and lots of borrowing with cheap money’ and varies wildly. Her analysis shows that what happens is a “financial collapse and as a result, the oil production drops.” And “once these financial shenanigans collapse, the whole thing falls down, but it does not fall down in the way that the Peak Oil predictions were made.” She sees affordability as the big issue — which means the beginning of the end of Peak Oil. The world economy collapses, resulting in oil production collapse and other collapses, with the result that the entire system will be unable to be brought back up. Even though a few big companies may have the cash to keep paying employees, the supply lines (small companies) will be dead. It is the financial system even more than the oil system which will have to be bailed out, and this is beyond possibility. The dilemma is that there is either growth or collapse. There is no tertium quid — no steady-state system in reality. A year from now, production will be down regardless of other developments. Our networked system has reached diminishing returns, even though alternatives are being tried; the EROEI is simply not there. We can not get the growth back. Emerging market debt will be a major problem (China, etc.). Non-shale states are way behind on jobs. Reining in interest rates will really bring the economy down, since that is what they have been using to offset oil prices. We need all the rest of the oil-exporting countries, but they will be cutting back on their exports due to the economic problems. In short, it will be impossible to put Humpty Dumpty together again after his fall. Derivatives, “haircuts” and many other problems are even now circling the drain of deflation. Strenuous political and economic activity may postpone the collapse for some months or a year or two, but not much longer. Cutting back on debt is lethal for oil production and the global economy, something most people do not understand.

One final thing that was not mentioned in this excellent dialogue: before the 2008 collapse and the very disruptive revaluation of the Swiss frank last Thursday (2015 Jan 15), there was absolutely no warning to the financial markets, the governments or the public at large. These events occurred like bolts out of the blue. So we can probably expect the collapse to manifest itself in the same way.

Makati1 on Sun, 18th Jan 2015 5:53 am

DMyers, I was unable to decide how you meant your comment about my “New World”, but instead of an old man praying (I’m an Atheist) Try one of a young man dressed as a pioneer and toting a rifle with a dog running by his side. It might be more appropriate for our future.

The old have little to worry about. We’ve been there and done that and have the wrinkles and memories as proof. Wither I have 30 years or 30 seconds is not important to me, nor do I have control over it. Life is here to be enjoyed to the last minute.

“Enjoy life because yesterday is gone and tommorow is never promised.”

shortonoil on Sun, 18th Jan 2015 8:59 am

To repeat my own opinion, as others seem to be doing with theirs: there ain’t no oil glut!

We are not expressing an opinion, we are stating the results of calculations that come from equations derived from the energy dynamics of petroleum production. A previously overlooked subject by most. Gail’s analysis seems to concur with our results, so we assume she is correct. She is using an economic approach, which we view as an art form. We are using a mathematical engineering approach. Of course, there is no reason why the two methods can not come to the same conclusion. We prefer our method because it allows for a determination of probable margin of error based on statistical evaluation. How these results will play out over time for the general economy, and especially for society as a whole is a matter of opinion. Considering the implications of the petroleum depletion event all opinions should be taken into consideration.

http://www.thehillsgroup.org/

Durwood M. Dugger on Sun, 18th Jan 2015 10:28 am

The assumption that old wells will be shut down is very probably erroneous. First of all the avg. oil well life is about 30 years – meaning that at any time the avg. well age is about 15 years old. The majority of oil being pumped today is from wells that are 15 years old or older – and were produced at costs from 15-30 years ago.

Oil well managers will shut down their most operationally expensive wells first. This would include poor producers/high service costs and then their newest and theoretically most expensive wells first. That said this is only a detail regarding oil operational costs – which is not necessarily connected to the market price of oil – as have the periodic market price swings from $30 to $150 barrels over the past five decades have evinced.

The real long term threat as Gail initially points out is the general cost of all energy. However, even if we find an economically cheaper than petroleum energy alternative, we are not home free – because we will still be dependent on non-energy petroleum economics.

Regardless of the price of petroleum – it is a critical resource with a finite extractable volume/unit cost. As that costs climbs with scarcity and increased real production costs (not market price) it does not effect the global economy’s various critical resource products evenly. For example air transportation and food production are very dependent not only on petroleum production costs, but its universal availability.

While the global economy may adapt to less air transport resources, it will not be able to adapt to less or more expensive NPK fertilizers and the petrochemicals that allow current high volume food production. The confluence of major unfavorable changes in petroleum availability/economics on global food production (now 95% dependent on petroleum) will be the ultimate source of a global economic collapse and the chaos that will follow.

Amvet on Sun, 18th Jan 2015 3:48 pm

The most recent EIA data shows that the global supply-consumption unbalance is less than 1%. There is no global oil glut.

The majority of global oil is consumed in developing countries. Oil use there is growing. The Saudis cut their oil price to help drive down the price of oil and the massive futures trading of our banks and funds did the rest. Objective? Regime change in Iran, Venezuela, and Russia. With production decline the globe needs about 3 million bpd of new production each year to stay even. Have you noted 30 new projects of 100,000 bpd?

Amvet on Sun, 18th Jan 2015 3:59 pm

Durwood, the only oil fields in the USA with increased production are shale and a shale oil well is about dead after three years.

Look at the EIA data on shale fields.
On a monthly basis, about 70% of new production is negated by the production fall in older wells. NG is simular. Of course many wells have been drilled but are not yet on production, so reduced drilling will not cause an immediate drop in production.

DMyers on Sun, 18th Jan 2015 6:35 pm

Makati1

What I was saying is it’s a very true statement you made, with a brevity that many would do well to emulate. It belongs as a saying on the kitchen wall to be read and pondered every day.

This is the picture I referred to.

https://images.search.yahoo.com/images/view;_ylt=AwrB8p7aS7xU3FoAnYeJzbkF;_ylu=X3oDMTIyaDNrbXBoBHNlYwNzcgRzbGsDaW1nBG9pZANlOTM0MWY1OGFjMGM1YTdmNWNmZmZkNTNmNzIzOGNjNwRncG9zAzEEaXQDYmluZw–?.origin=&back=https%3A%2F%2Fimages.search.yahoo.com%2Fyhs%2Fsearch%3F_adv_prop%3Dimage%26va%3Dold%2Bman%2Bpraying%26fr%3Dyhs-mozilla-001%26hsimp%3Dyhs-001%26hspart%3Dmozilla%26tab%3Dorganic%26ri%3D1&w=473&h=356&imgurl=imgc.allpostersimages.com%2Fimages%2FP-473-488-90%2F69%2F6965%2FRUCK100Z%2Fposters%2Fold-man-praying.jpg&rurl=http%3A%2F%2Fwww.allposters.com%2F-sp%2FOld-Man-Praying-Posters_i9680778_.htm&size=45.7KB&name=%3Cb%3EOld+Man+Praying%3C%2Fb%3E+Art+Print&p=old+man+praying&oid=e9341f58ac0c5a7f5cfffd53f7238cc7&fr2=&fr=yhs-mozilla-001&tt=%3Cb%3EOld+Man+Praying%3C%2Fb%3E+Art+Print&b=0&ni=21&no=1&ts=&tab=organic&sigr=123t4agtj&sigb=14e7n8iri&sigi=12qpd0n12&sigt=110t09q08&sign=110t09q08&.crumb=.mfcMrJP0e4&fr=yhs-mozilla-001&hsimp=yhs-001&hspart=mozilla

Whether the link takes you there or not, the picture is of an old man praying over a piece of bread. This same picture is found as a standard kitchen adornment at homes throughout the South and Midwest, along with folksy adages and scriptural passages. I meant no reference to you by the old man praying.

I’m old, myself, and a soft-core atheist, so I’m with you on the other matters mentioned.

Gail Tverberg: This Is The Beginning Of The End For Oil Production

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