The oil narrative begins to turn

The oil narrative begins to turn

The oil narrative begins to turn
Let’s talk about oil. The current low price is setting up a sold American recovery. Every drop in the price of gasoline sends less money back to the sovereign wealth funds of Russia, Iran, Venezuela and the rest of the middle-east. Each bit of money saved on gasoline is money that Americans can spend in American malls. And so the current low prices will rein in the aggressions of net-crude producers like Russia and Iran, will benefit net oil consuming regions like the United States, which can be expected to boom in the year ahead. These low prices are leaving hundreds of millions of dollars a day in the hands of American consumers.

But are we really at the start of a new economic golden age similar to the one that settled in over North America after the high oil prices of the 1970s gave way to low and stable oil prices in the 1980s? This is a great question.

Forty years ago the end of the volatile oil prices of the 1970s paved the way for two decades of golden economic growth in North America. The situation was similar to today. After a period of high prices, the price of the world’s single most important energy source declined. The price of oil stabilized at around $25 a barrel USD. The North American economy boomed through the late 1980s and into the 1990s.

The price of a barrel of crude would fall to just $15 a barrel by the very late 1990s. Who can forget the blessed economic glory days of that era? Inflation disappeared as a topic of conversation. The cost for household products was actually falling as vast amounts of cheaply-produced Chinese goods could be transported to America by oil-powered ships and then distributed by oil-powered trucks to Wal-Marts across the land. With the energy driving the system the cheapest it had been in a generation, prices were actually falling. Unemployment rates fell below the level economists thought could occur without triggering inflation. Looking back 1996, 1997 and 1998 were golden years, economically. The dot-come mania was taking off. Stocks were rising 20% a year. There didn’t really seem to be a whole lot to worry about.

And then things changed. Oil prices hit a generational low in late 1999. But after that the price of oil began to increase, would go on to rise for over a decade, eventually hitting a new world record price of almost $150 a barrel late in the day July 11th, 2008. Over that weird decade between 1998 and 2008 9/11 came and went, so did the War in Iraq, as well as a US housing boom and bust. Eventually the Great Recession settled in. Whenever the price of crude oil rises above 5% of total global GDP, as it did at the time, the economies of the consuming regions (Western Europe, America, Ontario) go into recession. The high price of oil had flooded the net-producing regions, Russia, Iran, Saudi Arabia, Venezuela, Calgary, with money. These regions boomed. Some of these countries rose to challenge American power in a way they could not in the late 1990s.   

Looking back the shift in the price of oil was one of the defining events of this era. People forget it today, but in the early 2000s economic elites did not think the price of oil could rise above $30 a barrel. To say so was to sound crazy. Everyone knew that, according to the most optimistic volumetric estimates of future oil availability, the price of oil could not go above $30 a barrel. If the price did raise that high, so much new production would come online that the market would be flooded; the price of oil would crash. It was the Economist magazine that predicted in late 1999 that the price of a barrel of crude was about to crash to $5 a barrel. Which did not happen obviously. The price of oil went the other way, rose to $150 a barrel. It is worth remembering that at the time the only people predicting the price of oil was about to spike far beyond $30 a barrel were the modern peak oil activists, the disciples of Marion King Hubbert , the Shell Oil geologist who came up with the flow-based method of future crude oil availability that predicted the modern spike in oil price.

Hubbert’s pessimistic flow-based story about oil is a narrative challenger to the optimistic volumetric story of oil. We’ll spare the gory technical details of that debate for now. But the recent history of the basic “narrative” about future crude oil availability is important to keep in mind today.

Here in 2014 the optimistic believers of the volumetric story continue to trumpet the boom in shale oil production in the United States. According to the cornucopians the current boom in production has ushered in a new era in American oil production. Which is correct, but not the whole story.

Yes, the boom in shale-based production in the states is a real thing. Many peak oil activists were surprised at how strong the boom was. Below is the data from the energy industry arm of the United States Geologic Service. Note what is clear on this graph. The peak in American production of oil Hubbert predicted would arrive in the early 1970s is still the overall peak in American production. The second peak occurred in the 1980s when Alaskan oil came online. Down at the far right of the graph is the remarkable “tertiary” peak in shale production. Which wasn’t predicted by Hubbert, but is a production boom that has not yet overtaken the primary peak in 1970.

Hubbert worried all his life simple volumetric estimates were, at best, in-deterministic, at worse, dangerously optimistic. He always relied on this flow-based data set generated by the EIA. As Hubbert saw it, the global oil age would be three hundred years long. There would be a century and a half in which flow would increase as more oil fields were found, as harvesting techniques improved. After that, daily production would begin to decline over time. The big chunk of convention crude oil would be found, produced and consumed in the sixty years between 1960 and 2020. Today, it is clear he has a point. It took one hundred years for production to rise from, basically zero barrels a day at the start of the harvest around 1865, to 40 million barrels a day or so by 1965. Since then the curve of production has “steepened” as technology and knowledge about oil advanced. Daily production exploded, rising as much as ten percent a year in the 1960s and 1970s. This basic flow data is found here,

Scroll down to the bottom for total world production in millions of barrels per day. In 1980 the amount of oil coming up from the entire world’s oil wells as 63 million barrels a day. Over just the last thirty years that amount has increased by almost a third to our current product no 92 million per day. But now global flow is struggling to continue to increase as rapidly as it has in the past. Conventional crude production is no longer climbing. Total production is only rising because of the addition of unconventional shale oil and natural gas liquids. Former MNR geologist David Hughes has been saying for years that expect this number to get to 90 or 95 million per day. But after that, as more of the big old conventional fields deplete, as we increasingly rely on hard-to-produce shale oil and tar sands, daily production begins to notch down over the decades to come. This seems to be happening.,&syid=2010&eyid=2014&freq=M&unit=TBPD

The peak in discoveries of major, large conventional oil fields peaked in the mid-1960s. Then the industry was find dozens of such fields a year. Now we find one or two every year or two. As the big conventional fields found back then increasingly go into decline, it will be tougher to replace that lost flow with the flow from shale oil and tar sands and ultra-Deepwater oil. The shale beds being tapped now were found back in the 1950s. Squeezing oil out of these non-porous, relatively impermeable rocks is, as a respected UK scientist recently put it, akin to “eating the box after the corn flakes” is gone. Shell Oil, in a 50-year outlook document released a decade ago, suggested then that the shale bubble could be expected to bloom, but would eventually run into “societal pushback” by 2015 as the intrusive drilling increasingly encroached on populated areas. Today, many complain about the toxic drilling practices. Vast amounts of water are needed to hydro-fracture the rocks to release the oil.
This is becoming onerous in an America facing a record drought in the southwest. So here we are in 2014. The big statistical tends are clear. New permits for future shale drilling are dropping (down fifteen percent this year). The new low prices are already working to trim the new shale production that created the "glut" and the low prices. Because shale wells deplete so fast, production from the shale regions will drop sharply in the years ahead. The price of oil will be back up not long after. The juiciest spots of the shale beds have already been drilled. Here’s a prediction: The peak oil story will be back the year after next, especially if total global production actually drops in 2015 as some think.

Below are some articles that take the less rose, pessimistic, flow-based “Hubbertian” take on future crude production. For all of the oil age these two different stories, the volumetric  and the flow-based one, have vied for narrative supremacy. The acceptance of one or the other seems to rotate every couple of decades. The disciples of Hubbert have quieted down through the shale boom. But they haven’t gone away.  They will be back. If America booms, the consumption of oil will go back up. If demand begins to increase at the same time as shale production is dropping, the current decline in prices is temporary. Here are some articles about that appeared this past week marking the turn in opinions around shale now occurring…

Happy Friday!

Will falling oil prices curb America’s shale boom?
Why crude oil will average 80 a barrel in 2015
Oil investors may be running off a cliff they can't see
Oil plunge to buoy global economy
  • Jeff Sanford 2014-12-05 1:45:43 PM
    Well, well, well...the story above suggested new drilling permits dropped 15% a month ago. The latest stats are drilling permits are down 40%. Will the narrative shift around oil play out even faster than thought?
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