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Peak Oil: Then What?


Diminishing returns occurs when it takes more and more energy or other resources to produce the same amount of goods. In the case of oil supply, we reach diminishing returns because companies extract the easy-to-extract oil first. Thus, the price of oil rises because the oil that can be produced cheaply is mostly gone. If we want to obtain more oil, we need to extract the more expensive to extract oil….
If oil prices drop to a low level and stay down, a large share of oil production will be discontinued. [1]

Then what?

Cheerleading efforts suggesting oil prices are on the verge of dropping [see my last two posts for one of the more egregious recent examples: 1, 2] without facts or context sounds like an economic answer to one of many financial struggles too many of us are wrestling with these days. Who doesn’t want to pay less for essentials?

But as Gail Tverberg, Steven Kopits, many other knowledgeable peers, and even little ‘ol me have stressed, low prices come at a cost when discussing energy supply. The trade-off carries many obvious and not-so-obvious implications and consequences.

Since those mouthing the official fossil fuel industry playbook’s “lower prices!” language neglect to mention the other side of that story (fairly standard practice these days), those of us not at all delighted with the truth yet determined to do our part to provide the public with the full range of information must step in to connect the dots. My turn today.

There have been a number of reasons (accurate, to be sure) justifying at least a little bit of chest-pounding by oil producers regarding the rise in oil production totals in the past few years. As has been ably reported across the media landscape, most (if not all) of the gains result from the tight oil extracted by the process of hydraulic fracturing (“fracking”) of shale formations here in the United States.

The Bakken Formation—located primarily in North Dakota with some extension into Montana—and the Eagle Ford region in South Texas combined have been responsible for more than 80% of the production increases. Ron Patterson in particular has done an excellent job detailing some of the predominant concerns about future production.

Leading the list of concerns Ron and other knowledge experts continue to raise is the rapid decline rate of fracked wells; their much higher costs; the growing concerns about environmental harm to the air and drinking water near drill sites; the enormous amounts of water required to frack these wells, and like the conventional crude oil fields we’ve all relied upon for at least a couple of generations the simple fact that the easy-to-find and easy-to-extract supply sites have been in production for—in many cases—decades.

Given that we’re dealing with finite resources, continuing to draw them down creates a fundamental problem most third-graders could figure out. Couple that reality with the obvious conclusion that the industry is now picking through the not-quite-as-easy-to-find-and extract/produce substitute locations (the much more expensive ones), we’ve got some challenges ahead if Life As We Know It and Business As Usual are still the objectives society is pursuing.

It bears repeating if for no other reason than the Lower Prices Are On The Way! crowd doesn’t seem to appreciate the outcome: more expensive and technologically challenging production efforts require the opposite of low prices. We consumers prefer the opposite of high prices. So when our behavior dictates that our interests prevail, the fossil fuel industry sees a reduction in the funding supply for its more expensive efforts.

So production declines. When production declines, so doesn’t supply. Lower prices might result from that economics conundrum, but if we don’t have as much to purchase, then we have yet another conundrum.

Then what?

Low prices in a world of abundant supply: Good news for consumers. In a world of diminishing supplies of affordable and readily available fossil fuels, low prices lead to the industry sitting on its hands. Less for us.

Given how infrequently industry cheerleaders point that out to the public, this context-free low/high price dance leaves us with fewer days and fewer opportunities to engage in the meaningful conversations we’re going to have voluntarily or otherwise. That would not be a wise strategy to continue pursuing.

The industry and its mouthpieces can help, or hinder.

Peak Oil Matters

11 Comments on "Peak Oil: Then What?"

  1. Davy, Hermann, MO on Fri, 25th Apr 2014 8:55 am 

    The markets will react to the real life balance sheet data. These people are in business to make money. Lobbyist on big oil side are too. Recently markets have been agreeing with the big oil lobby because BO has produced results. Markets are always full of hype and traders buy some of that if there are results. Currently the data that cannot be hyped or manipulated is painting a different picture for BO. New results are showing worrying trends of higher costs and lower production. This is not be missed by the markets. The data is not yet negative enough to cause adverse sentiment. These folks like trends and graphs. When the trends start painting a longer term problem believe me the markets will move. The oil market is not there but we are getting closer. Forget about the general public. Their level of education and points of interest are not in this world. Yet, the movers and shakers in this world are in the market and it is in the market that status quo BAU will be judged. Money talks and walks. We are going to see a generalized panic at some point that will initiate a bear market and higher cost of money. Folks it is the higher cost of money beyond what the central banks can repress that will be the beginning of the end for status quo BAU. Just like cheap energy built the old status quo BAU the recent new normal (since 2008) has been maintained by cheap money. It is anyone’s guess how, when, and where this will play out but the system will cycle. Those who think we are beyond a business cycle and or the cycle has become risk friendly with very long cycles will be sadly mistaken and be swept away by the storm. Baton down the hatches mates the storm is a blowin in.

  2. westexas on Fri, 25th Apr 2014 8:58 am 

    If we subtract out estimated volumes of rising global condensate production, I estimate that actual global crude oil production* was below the 2005 rate for six years, and approximately flat in 2012 and 2013.

    I estimate that the average global crude oil production rate for 2006 to 2013 inclusive was about 65 mbpd, versus about 67 mbpd in 2005.

    Something else to consider is the gross underlying decline rate from existing production. A few years ago, ExxonMobil put it in the 4% to 6%/year range. Note that the recent 10 year net decline rate in Alaska’s C+C production was 6.5%/year. This was net, after new wells were added, so the gross underlying decline rate was higher.

    Given the shift to high decline rate tight/shale plays and given a global reliance on smaller, high decline rate conventional fields, e.g., Thunder Horse, I suspect that the gross underlying decline rate has only increased.

    In any case, let’s (conservatively) assume that the gross underlying decline rate from existing global crude oil production is about 7%/year, from a supply base of about 67 mbpd in 2013. Over the next 10 years, in order to maintain 67 mbpd of actual crude oil production, we would have to put on line 47 mbpd of new crude oil production.

    Or at a gross underlying decline rate of 7%/year, in order to maintain 67 mbpd we would have to replace 100% of current global crude oil production, i.e., put on line 67 mbpd of new crude oil production, in about 14 years.

    *45 or lower API gravity crude oil

  3. bobinget on Fri, 25th Apr 2014 9:26 am 

    Decades ago, traveling around Europe, did you ever wonder how folks managed paying the equivalent of four bucks a gallon when their pay, on average, was lower then Americans were making at the time?

    I know, I know, distances are shorter, cars smaller, trains, buses, elegant, faster, more frequent. Those facts never really explained how Europeans managed.

    As an experiment… some day, take a longer then 300 mile US Greyhound Bus journey. This is the best way I can think of to see our post peak oil futures. NOW.

    If you enjoy traveling… another, more fun way.

    In Nicaragua a person can hire a taxi for around $100
    for a hinterland two hour trip. Someone with a hundred bucks could also ride a six hour “Chicken Bus” to the same destination. I highly recommend saving $97. if only to experience America’s future.

  4. Northwest Resident on Fri, 25th Apr 2014 9:43 am 

    “The industry and its mouthpieces can help, or hinder.”

    It seems clear to me that the industry and its mouthpieces decided some time ago to implement a relatively short term strategy of maintaining the status quo — keep the masses calm and unaware, keep the global economy clunking along as best as possible using any amount of fraud, money-printing or other “tricks” to keep that global economy from falling apart.

    The people implementing this strategy are too smart to believe that the strategy is anything BUT a short term “fix”. Clearly, the strategy is to BUY TIME.

    TPTB are not interested in helping or hindering. That’s the way it looks to me. What they are interested in is preparing for a big reset. That is a smart strategy from my point of view, because that big reset is coming and nothing will stop it. It is on the way, like a big train off in the distance you can hear it and you can feel the ground shaking, but it isn’t quite here — yet.

  5. Perk Earl on Fri, 25th Apr 2014 9:52 am 

    “Just like cheap energy built the old status quo BAU the recent new normal (since 2008) has been maintained by cheap money. It is anyone’s guess how, when, and where this will play out but the system will cycle.”

    Oh jeez – no wonder Wall Street was starting to panic when Old Yeller suggested interest rates would begin rising just 6 months after concluding the monster giveaway (for a nominal fee) to the super wealthy via QE. Of course she was pressured to recant those words just a few days later, claiming low interest rates would continue ad nauseum to spur the endless (not yet) recovery, but like you mention Davy, no cycle lasts forever.

    Food for thought as to when that will take place.

  6. Northwest Resident on Fri, 25th Apr 2014 10:16 am 

    “Food for thought as to when that will take place.”

    My guess is, when TPTB are good and ready, not a moment before, and not a moment later.

  7. bobinget on Fri, 25th Apr 2014 10:22 am 

    Thank you WestTexas for that easy to understand round-up.
    Geopolitically, IMO it will be impossible to meet goals set out by IEA:
    “The IEA now sees demand rising by 1.4 mbpd (or 1.5 per cent) this year to approximately 92.7 mbpd, from 1.3 mbpd (1.4 per cent) last month, said the latest NBK Economic Update”.

    This represents a modest acceleration on last year, as global oil demand is estimated to have grown by 1.3 mbpd in 2013. All demand growth is projected to come from emerging economies, with non-OECD Asia accounting for almost half of the global increase.

    Meanwhile, total Opec production (including Iraq) increased to above 31 mbpd for the first time in five months on the back of surging Iraqi output”.

    Or EIA:

    No forecast a few years ago predicted Fukushima, a ‘game’ changer for the world’s third biggest economy.

    Intense storms predicted for the US this week-end reminds us, absolute certainty of Climate Change is NEVER factored into demand quotations. We all learned a climate related terms this winter. Who put it together that when Right Wing TV and radio brand
    terms like ‘Arctic Vortex’ liberal clap-trap they understood the threat utterly? The reality is
    we are in for more serious “unexpected” energy consumption like the sort that raised NG prices with future shortages in storage.

  8. J-Gav on Fri, 25th Apr 2014 10:27 am 

    Yup – They know by now that the system is too corrupt to be reformable. So the strategy is to MAKE IT EVEN MORE CORRUPT in order to, as NW says, buy time … and try to increase their chances of pulling through when TSHTF.

    As far as I can tell, the only viable counter-strategy from what Makati calls “the serfs” is to develop bottom-up coherence and resilience to the extent possible. Attempting to take the juggernaut head-on looks rather suicidal to me. We keep reading articles about how the U.S. “is becoming” an oligarchy and America “is becoming” a police state… BS! The oligarchy and police state (national security state) are already in place. Open your eyes and you will see.

  9. Davey on Fri, 25th Apr 2014 10:57 am 

    Gav, I am hoping Kunstler is right when he predicts most large organizations will contract with the coming decent . I hope this means the evil U S security apperatus. An unstable grid and fuel shortages will play havoc on these organizations I would think.

  10. J-Gav on Fri, 25th Apr 2014 12:19 pm 

    Davey – There will no doubt be some unravelling at that level too but the fortress-like safeguards they’ve built around their wealth might well afford them some extra time to adapt, whatever that could mean at that stage.

    In other words, OUR welfare (health, shelter and the rest of it), general communication and internet capabilities, etc will suffer more and faster than THEIRS. Whether or not that situation will provoke an uprising is an open question … but I don’t see any segment of an overly complex society NOT feeling the heat of overshoot and diminishing returns at some point.

  11. shortonoil on Fri, 25th Apr 2014 5:18 pm 

    It is hardly surprising that world GDP, and petroleum production have followed the same curve for the best part of the last century (see study graphs, Graph# 25 at our site). Petroleum has been the energy source of choice because of its high energy density, and low cost per BTU. Its ease of transport, flexibility of application, and abundance has made it the driver of new technologies, innovation, and the mainstay of modern society. At the same time, its convenience, and benefits have disguised its draw backs! It has the potential to do grave direct, and indirect environmental damage, and its supply is finite!

    Only a portion of the world’s liquid hydrocarbons are serviceable, or desirable. That portion is the part that contains a high energy density, and can provide those low cost BTU. That portion became so desirable that it drove a frantic pursuit to acquire it. Without much regard for the outcome we have extracted about three quarters of that highly serviceable portion. The dredges of liquid hydrocarbon supply will be left for those to struggle with in the future.

    That it will require an ever greater part of our effort, and wealth to acquire the little remaining high quality supply is hardly in question. The question is will we exhaust ourselves, and our world in pursuit of a dwindling supply of black gold. Will we be seduced into pursuing what will very soon no longer be there?

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