The global oil market is so different today as compared to what it was three years ago that it’s borderline unrecognizable. These changes are being hammered out in a battle between petrostate producers on the one side pushing for a rebalancing of supply and demand by cutting their own output, and a group of upstarts on the other, led by U.S. shale companies, that want to fight to bring the costs of production down permanently from their previously high ($100+ per barrel) levels. No one is more qualified to put this in its proper context than the famed oil historian Daniel Yergin, and in a recent piece for the WSJ he traces what he calls a “cost recalibration” that’s affecting producers not only in America’s shale formations, but outside of the United States as well. He writes for the WSJ:
This cost recalibration is happening everywhere, as a new analysis by IHS Markit shows. Canada’s oil sands have always been among the highest-cost, yet some new projects can produce near $50 a barrel. In Russia, costs have come down more than 50%. Even deep waters offshore can now produce at less than $50. In March the CEO of the Norwegian company Statoil told the CERAWeek conference that owing to a wholesale redesign, a project in the North Sea that had originally required $75 a barrel to be economical now needs just $27 a barrel. […]
As oil producers get back to business all over the world, some of the big cost savings will be given back, which will support rebalancing—so oil prices will rise. But the entire business has been recalibrated to a lower price level. An industry that had become accustomed a few years ago to $100 oil now regards that as an aberration that will not recur absent an international crisis or a major disruption. The lessons about costs since the price collapse are not going to go away. They are too powerful to forget, and too painful.
From Yergin’s expert point of view, the days of $100 oil are behind us, barring some unforeseen catastrophe. That is a major shift not only for the oil market, but also for how we think of energy in the 21st century. While not entirely diminished, fears of scarcity are being replaced by concerns over downstream bottlenecks and how best to handle this newfound abundance of hydrocarbons. These are, as they say, good problems to have.
There’s another thought here: one of the big drivers in the falling costs of oil production is the use of information technology at all levels of the production process—from looking for likely places to drill to the design of rigs and all through the pumping and refining process. These enhanced efficiencies are likely to continue as the full impact of IT is only beginning to be felt.
It’s hard to exaggerate just how striking this is. The oil industry is more than 150 years old, and oil ‘should’ be getting more expensive to find and to pump, not less. The most obvious oil fields should have been found first, and the most promising wells dug long ago. We should now be living in a world of diminishing returns, with more and more money chasing less and less oil. It was this prospect that led so many doom and gloom thinkers in the 20th century to agonize over ideas like “peak oil”.
All that may happen some day, but apparently not soon. The information revolution is so powerful that it can reverse what would otherwise be the natural tendency of the oil market.
But this points to two even bigger stories. One is that the same forces that are making oil and gas so much cheaper and easier to find and extract will also be affecting other commodities. We can expect mining to become more efficient as well, and in fact there’s already evidence of that happening.
And there’s more. One of the big mysteries of the information revolution is the question of productivity. We keep using all this tech that clearly lets us do more with less, but instead of galloping higher, productivity levels have stagnated. What’s going on?
It’s possible that the productivity increases are appearing as lower prices rather than as higher incomes. If the price of oil falls from $100 per barrel to $50 per barrel due to increasingly cheap and efficient methods of production, then everybody in the industry is more productive in terms of barrels of oil per hour of work, but since the oil price has gone down, that productivity increase won’t be captured by statistical methods that calculate productivity in terms of money.
And that is just part of the larger story: that the extraordinarily deep and sustained collapse in the price of information is disguising the enormous increase in the productivity of everyone who works with the defining product of our time. Journalists, to take one (for the staff here at TAI) depressing example, are producing much more “information” than ever before. Armed with the internet, the TAI writers can cover a range of subjects with a wealth of detail on a daily basis in a way that a much larger staff simply could not have matched 20 years ago.
On the other hand, the very explosion in the productivity of writers generally has meant a rapid collapse in advertising revenue. Measured in units of information processed and produced, the TAI staff is much more productive than past generations of journalists; but the very abundance of supply caused by the productivity of the sector leads to a crash in values that, again, makes the productivity revolution invisible to methods of measurement that look solely to revenue per work hour.
At the same time, the collapse in the cost of information helps disguise the enormous increase in living standards for most people. Anybody connected to the internet and using a smartphone today devours quantities of information today that medium sized companies could not produce in the 1970s. The African villager with a solar powered smartphone has more access to more information than Louis XIV in the halls of Versailles.
But since the cost of this product is falling so quickly, the rise in living standards we are living through isn’t measured.
Just as the industrial revolution forced economists and businesses to find new ways to measure output, the information revolution is likely to lead to revolutions in the way we measure economic performance in the 21st century.
kanon on Fri, 19th May 2017 7:30 pm
“The oil industry is more than 150 years old, and oil ‘should’ be getting more expensive to find and to pump, not less.”
I thought the oil price was still above the long term average, but that can’t last given the “forces that are making oil and gas so much cheaper and easier to find and extract.” It won’t be a problem, since everything is becoming so much more productive. This will be especially helpful with the really deep water oil and the kerogen shale oil. But I am a contrarian and I expect this means solar power will be our last best hope.
eugene on Fri, 19th May 2017 8:58 pm
If I just shovel enough bullshit, I’ll find a miracle.
Sissyfuss on Fri, 19th May 2017 9:09 pm
The-American-Interest.com. Oh gee, they sound like a nice objective swell bunch of guys.
rockman on Fri, 19th May 2017 11:00 pm
“… the famed oil historian Daniel Yergin”. Fortunately an early warning that allowed me to stop reading then. But I still read the posts.
kanon – “… and oil ‘should’ be getting more expensive to find and to pump, not less.” As the Rockman has explained many times before: exploration for conventional oil/NG targets is so much easier today then when he started 40 years ago. And 3d seismic is a very big reason. Search yourselves for the details. But this IS NOT an exaggeration. Productivity of seismic exploration back then: it would take 5 very experienced geophysicists 6 months to map the same area with 2d seismic that one geophysicist 1 month to do today. And it wouldn’t take a room filling mainframe computer: it could be done with the CPU sitting under the Rockman’s desk. And so much data instantly available he has three 24” monitors on his desk. And the quality of the 1 month of 3d work would be 5X better then that 6 month output.
Again: not an exaggeration. Add an incredible increase in some trends: as much as 15% increasing to 80% was not uncommon. Thus while 3d seismic lead to many discoveries it cut the number of dry holes even more. It became so successful, depending on the trend, management would not even review a prospect that didn’t have 3d coverage. And even before 3d became game changer 2d seismic processing improved the success rate tremendously: using a new 2d seismic attribute in the later 80’s the Rockman hit 23 out of 25 small stratigraphic traps in a trend with a ore-seismic success rate of less then 10%.
When you take into account the savings in manpower and the dry holes it cost much less per bbl to find a new commercial conventional reservoir today then it did 40 years ago. Of course many will have trouble accepting that FACT given all the bullsh*t tossed out by all the “experts” that never generated a prospect themselves.
But read these words carefully: it is much easier to find the remaining CONVENTIONAL reservoirs today then ever before. Which is not the same as saying it’s easier to find MORE conventional reservoirs. Especially the larger ones. Which explains why the volume of new discoveries have decreased while the ability to find them has improved significantly: there are much fewer left to find.
That covers exploration of CONVENTIONAL reservoirs. There’s been no exploration needed of the UNCONVENTIONAL plays like the Eagle Ford and Bakken: both were proven to contain producible hydrocarbons more the 5 decades ago. Now we’re switch the conversation from the ease of FINDING vs the ease of EXTRACTING hydrocarbons. Not going to detail that: if you don’t understand now you never will. LOL. But having more productive methods for extracting oil/NG alone from the unconventional reservoirs wasn’t enough to cause the production boom: it also took record high oil prices. And even though that tech has improved with continued tweaking significant drilling still requires the current oil price that is still well above the historic average.
So no: conventyional oil/NG should be less expensive to find over time. Just as it should become more difficult to find as much production as we have in the past. And unconventional oil/NG reservoir should becomes easier to produce as tech improves. Tech that will require higher oil prices to justify the expense of that tech. For instance after making a conventional reservoir at 6,000′ feet the well completion may cost $600,000. But an unconventional reservoir at 6,000′ completed in a horizontal well bore can still cost $4 million today.
No: to understand the current dynamics of both conventional and unconventional reservoir development takes more then a few simplistic statements.
rockman on Sat, 20th May 2017 7:49 am
“Even deep waters offshore can now produce at less than $50.” And another example of someone making up an economic limit that has no basis in reality. Even a DW field of modest size (100 million bbls) would gross $5 BILLION and net at least $3.5 BILLION on average. IOW very economical at $50/bbl. Now consider the 300+ million bbls: very economic at $20/bbl…or less. So yes: DW fields are very expensive to develop. But also produce the highest per well URR. A great onshore well might recover 500,000 bbls of oil. But a DW well with a million estimated URR wouldn’t be drilled. Individual DW wells can each recover 10 to 30 MILLION BBLS.
Which also emphasizes the point that there is no one oil price that reservoirs in any trend, like the Eagle Ford Shale, are economic to develop. Which is why EFS wells are being drilled and producing profitably at $45/bbl today. And that’s despite claims by armchair experts that all shale wells need $60+/bbl to worth drilling. Some wells would be drilled at $25/bbl…just not as many. Likewise there are many EFS wells that would not be worth drilling at $90/bbl.
They toss out such bullsh*t numbers because they understand little about the process or too lazy to explain the details.
green_achers on Sat, 20th May 2017 12:06 pm
Hey, everybody, we’re all going to be RICH!*
*In information. Does not apply to food.
Hamster on Tue, 23rd May 2017 11:51 am
Not long ago, I read an article here that contained a statement to the effect that in 2016, we used three times as much oil as we found. There is long time delay built into the system, but eventually the cumulative effect of consumption wildly outpacing discoveries will bite. As to when that will occur, it is an occupational hazard of armchair Cassandras to call it too early.