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Robert Rapier: Sleepwalking Into The Next Oil Crisis

Consumption

One school of thought is that future oil demand is set to decline because consumers will have better options. Many in this “peak demand” camp believe that the growth of electric vehicles will soon make oil obsolete.

That’s a relatively painless view of the future and is consistent with much of our past experience. Old technologies are frequently replaced by newer, better, and cheaper technologies.

I have written previously on why I don’t believe this version of future oil demand will unfold anytime soon. In a nutshell, if you “do the math,” it becomes clear that it will be years before EVs can take a meaningful bite out of oil demand.

Meanwhile, some organizations are sounding the alarm that rather than a peak demand scenario, we may soon face a peak supply scenario. Or at the least, the loss of global excess spare capacity. The last time this happened, oil prices rose above $100 a barrel.

Words of Warning

In January 2017, Saudi Arabia’s energy minister Khalid A. Al-Falih warned CNBC that he foresaw a risk of oil shortages by 2020:

“I believe if the investment flows that we have seen the last two or three years continue in the next two or three years, we will have a shortage of oil supply by 2020. We know, from what we have seen in the last couple of years, that prices around the current level and below are not attracting enough investment. We know the level of natural decline that existing production is undergoing, and we know that demand is picking up at 1.2 to 1.5 million barrels a year. So between increase in demand and natural decline, we need millions of barrels every year to be brought to the market, which requires massive investment.”

In March 2017, the International Energy Agency published its market analysis and forecast report, Oil 2017. In the report, the IEA warned that the global investment slump of 2015 and 2016 already poses a risk to future oil supplies and that 2017 global spending didn’t look encouraging. Oil supplies are growing in the U.S., Canada, and a few other places around the world, but the IEA report concluded that this growth could stall by 2020 if spending doesn’t pick up.

The report projects that if current trends continue, spare production capacity in 2022 will fall to the lowest level since 2008 (when oil prices nearly reached $150/BBL). On the topic of EVs, the IEA estimated they will only displace small amounts of transportation fuel by 2022. Further, the IEA said that it doesn’t foresee peak oil demand anytime soon.

Halliburton, the world’s largest hydraulic fracturing service provider, reiterated the IEA’s forecast last summer at the World Petroleum Congress in Istanbul. Mark Richard, a Senior Vice President with the company, said that the $2 trillion in spending cuts in the global oil industry over the past few years would impact the price of oil around 2020. Richard added, “ Sooner or later, the market is going to catch up. You’ll see some kind of spike in the price of oil. Maybe somewhere around 2020-2021, but it’s got to catch up sooner or later.”

The British multinational bank HSBC gave similar warnings in its Peak Oil Report 2017. The report noted that the oil market is currently adequately supplied, but spare production capacity could soon shrink to just 1% of global supply, bringing the risk of disruption and the subsequent volatility back to the oil markets. HSBC noted that oil demand continues to grow at more than one million BPD every year, and they didn’t see a peak demand scenario before 2040.

The HSBC report further noted that global oil discoveries have been declining and that 81% of the world liquid production is already in decline.

Shale Oil and OPEC May Not Be Enough

Former Energy Information Administration (EIA) head Adam Sieminski warned of a decade of disorder:

“Maybe we are going to be less volatile now because shale can feed into rising demand. I’m thinking that the decade of the ‘20s is going to be one of difficulties. That’s why I call it the decade of disorder. We’re not getting enough capital investment now, I don’t know that shale is going to be able to do it all.”

There are some who suppose that OPEC has enough spare capacity to flood the market and keep oil prices in check. But Ed Morse, Citibank’s Global Head of Commodities Research, warned that OPEC may be pumping at maximum capacity and that there is a risk of a market squeeze due to under-investment by OPEC countries:

“Fear in the market has been that OPEC production will rise dramatically, however, there could be a supply gap emerging, which could point to a tighter market. We’re seeing more and more evidence that it’s not the international oil companies, it’s not the independent oil companies that are lagging new investments, but it’s OPEC countries lagging, particularly those five [Libya, Nigeria, Venezuela, Iran and Iraq].”

Plummeting Discoveries

But the risk isn’t just from lack of investment. On the topic of new global oil discoveries, in December, Norwegian research firm Rystad Energy reported that oil companies discovered less than seven billion barrels of oil and gas in 2017 — the lowest number on record. Rystad indicated that this would only replace 11% of 2017 oil and gas production, and that the last time the world discovered enough oil and gas to completely replace that year’s production was 2006.

Since the beginning of the shale revolution a decade ago, the world has discovered 110 billion barrels of oil. Meanwhile, consumption has totaled 360 billion barrels. This 250 billion barrel deficit between discoveries and consumption seems sure to grow in the years ahead, given recent oil discovery trends.

It is understandable why people would be complacent about this scenario. After all, didn’t the world face similar risks a decade ago, only to have shale oil save the day? But it isn’t clear that there is another “shale oil miracle” that is ready to save the day. There are indeed more high-cost oil resources out there that can be developed, but these projects take a long time to complete. That’s why we can look out two to three years and see an impending supply crunch. The longer investments in the industry remain depressed, the more unavoidable this scenario becomes.

Robert Rapier has over 20 years of experience in the energy industry as an engineer and an investor. Follow him on Twitter @rrapier or at Investing Daily.

Forbes



33 Comments on "Robert Rapier: Sleepwalking Into The Next Oil Crisis"

  1. BobInget on Fri, 23rd Mar 2018 11:42 am 

    Venezuela just today shut down three refineries.
    Propane, a direct by-product of crude oil refining was one of the last real govt. benefit Venezuelan people received..

    I don’t know why Rapier and others don’t acknowledge Venezuela’s perilous situation.

    Saudi Arabia cancelled it’s IPO for one good reason. Fields simply can’t stand transparency.
    The world, not just US cannot get by w/o Venezuelan crude oil.

    That Iran’s oil industry will lack US funding and expertise caused crude to jump $3.50 overnight
    stands in stark contrast to the slow decay in Venezuela, with ten times proven reserves.

    One last remark for the day.
    If Venezuelan oil workers don’t show up for work
    2020 arrives in May.
    (average V oil worker is paid enough to buy 2 eggs for a day’s pay)
    IOW’s we witness entire collapse.

    More ominous, Why don’t Russia or China
    ship in food aid? Or, can they?

  2. MASTERMIND on Fri, 23rd Mar 2018 11:47 am 

    Fuck yea! This is my boy from the Peak oil FB group! I gave him all the sources for this! Now I can just link to one article instead of four! He fucking nailed it! Best peak oil article written in a decade! SUCK IT HATERS! All that peak oil stuff that was ignored because of shale a decade ago is going to come roaring back with a vengeance!

    See this is why I am the MM!

    Clogg is going to be soooo Triggered! LOL

  3. MASTERMIND on Fri, 23rd Mar 2018 11:51 am 

    Bob

    That is a good point! We need that heavy oil from Venz to mix with out ultra light shale…The bankers will likely extend and pretend to Venz though. I doubt they will cause them to default. Deals can be made you know. But replacing all the worlds declining conventional production can’t be solved by anyone!

  4. MASTERMIND on Fri, 23rd Mar 2018 12:34 pm 

    I predict clogg will come in any moment and spam this post to high hell. Saying renewables are going to save the day. Even though peak oil is a liquid fuels problem. not an electricity issue. LOL

  5. Davy on Fri, 23rd Mar 2018 1:09 pm 

    Good article but as usual no mention of a possible economic correction. Considering the trade wars in progress and other destabilizing conditions an economic correction is quite possible. That could be peak oil demand as well as peak everything.

  6. BobInget on Fri, 23rd Mar 2018 2:21 pm 

    MM, we can get all the heavy oil WE need from Canada, where Russian owned CITGO will be sourcing hvy oil from now on.

  7. BobInget on Fri, 23rd Mar 2018 2:23 pm 

    Davy has a point. However, before this so called trade war gets put into effect, we may have a new administration.

  8. MASTERMIND on Fri, 23rd Mar 2018 3:01 pm 

    MM is like the wizard of OZ now! the man behind the curtain pulling all the levers of the MSM!

    And crickets from Greg and Clogg! LOL I love it!

  9. Cloggie on Fri, 23rd Mar 2018 3:24 pm 

    “MM is like the wizard of OZ now! the man behind the curtain pulling all the levers of the MSM!”

    Chosenite megalomania in actuion.

  10. Anonymous on Fri, 23rd Mar 2018 3:30 pm 

    Future supplies have always had an issue of uncertainty. You can see this going back to at least the 1970s in terms of popular press. and there were peak oil scares after the First and Second World Wars as well.

    I just read the Mason Inman bio on Hubbert and Wallace Pratt (in a letter that was very warm and complimentary to Hubbert) warned him that Pratt had previously been a peak oil worrier several times in the early 20th century and each time they found more. Adelman or even McKelvey, while at times a little cheerleadery, have been much more insightful in realizing that more oil can be identified and produced than what we we know now…that both time and technology lead to new finds.

    As far as “discoveries”, this is something that is not usually properly portrayed. Current “discoveries” tend to grow over time. Easy examples include the Kern River oil field or the Bakken formation. Kern River is a hundred years old and Bakken is sixty. But we found more oil in them over time than the initial discovery reports. When “discoveries” are reported, they are only new fields, formations, etc. When we find more oil in the OLD fields, this is not considered a current discovery and instead the new oil is allocated BACK in time. Hubbert actually knew of this issue…realized current discoveries need something like a factor of THREE to make them meaningful in terms of eventually what the discovery means. Took him a little while, but he did get it. Modern peak oilers miss this a lot.

    Uncertainty on current investments for future demand are a common business issue. This isn’t even that different from manufactured commodities. Future supply and demand are hard to predict. So what? Life goes on.

    Falih is talking his book and is the dominant player doing so. So of course, he wants to say there will be future scarcity. But we just had 2 years of price correction. And he had to engineer a production CUT to get prices up moderately.

    The financial markets don’t predict prices will go up. The opposite. Now the market could be wrong. Just like anyone can be right or wrong. But right now the “betting line” is not with Rapier or Falih.

    If I’m an investor or a CEO looking at a project that Rockman brings me that needs $70 oil to work, should I approve it (figuring future prices will be up there) or should I pass, based on the futures curve? I think any rational investor will pass.

    The solution for low prices is low prices (and the converse). But right now the market doesn’t think future supply/demand will be tight…the opposite. If the market misguesses big deal, we get a correction and prices rise and some demand gets pushed out (and with time new supply comes on). However, there is also the OPPOSITE danger, that market misjudges future supply tightness and we have too much oil and a price crash.

  11. MASTERMIND on Fri, 23rd Mar 2018 3:30 pm 

    Clog

    We are not going to be using underground coal buried underneath the ocean floor. That would cost a small fortune! The same reason why we dont dig up the gold buried under the ocean. And the daily mail is a laughable source! Your grasping at straws! So pathetic! LOL

  12. MASTERMIND on Fri, 23rd Mar 2018 3:40 pm 

    Annoymouse

    IF all these oil discoveries grow over time Hubbert predictions wouldn’t have been right twice! You dumbshit!

    https://imgur.com/a/6dEDt
    https://arxiv.org/pdf/1708.03150.pdf
    https://www.scientificamerican.com/article/has-peak-oil-already-happened/

  13. MASTERMIND on Fri, 23rd Mar 2018 3:41 pm 

    The End of the Oil Age is Imminent!

    Recently, the HSBC oil report stated that 80% of conventional oil fields were declining at a rate of 5-7% per year. This means that there will be an oil shortage of ~30 million barrels per day by 2030 and ~40 million barrels per day by 2040.
    http://www.scribd.com/document/367688629/HSBC-Peak-Oil-Report-2017

    What is mentioned far less often is that annual oil discoveries have lagged annual production since the 1980s.
    https://imgur.com/a/6dEDt

    Now, this problem has nothing to do with the recent decline in the oil price, which started in 2014. This has been an on-going problem for the past 30 years. Now, the IEA is predicting oil shortages by ~2020 due to declining exploration.
    https://www.wsj.com/articles/iea-says-global-oil-discoveries-at-record-low-in-2016-1493244000

    Here, the IEA blames this problem on the low oil price. But, this problem started in the 1980s. The problem is geological: we are running out of conventional cheap oil. Shale and tar sands are not the answer, either. Those resources are far too expensive, compared to conventional oil, because the global economy is based on cheap conventional oil. Expensive oil is not a replacement for cheap oil.

    Based upon the HSBC report and the IEA, the End of Oil Age will start around ~2020: there will be a dramatic economic depression due to exhaustion of cheap oil. This will cause a global economic collapse.

    https://imgur.com/a/OB1w6

  14. Cloggie on Fri, 23rd Mar 2018 3:42 pm 

    “And the daily mail is a laughable source! Your grasping at straws! So pathetic! LOL”

    So you want tribal news?

    https://archive.nytimes.com/www.nytimes.com/gwire/2010/04/16/16greenwire-researchers-explore-coal-without-mining-in-bid-90786.html?pagewanted=all

  15. MASTERMIND on Fri, 23rd Mar 2018 3:57 pm 

    CLogg

    Your source is out dated and just another pipe dream! LOL Just like fusion and bio fuels! Etc…I am sure when the oil shortages hit you will squeal we have tons of coal underground those greedy bankers just dont want to use it! LOL

  16. MASTERMIND on Fri, 23rd Mar 2018 3:59 pm 

    Clogg

    From your source “The Aachen project is still theoretical. ”

    And eight years later it still is! LOL

  17. kiwichick on Fri, 23rd Mar 2018 4:10 pm 

    as MM has stated ….bottom line is we are not making any more fossil fuels , whether you are talking oil, coal or gas , and the decline in discoveries shows this , despite the huge advances in technology

  18. Anonymous on Fri, 23rd Mar 2018 4:11 pm 

    ND “peaked” because the price crashed from $100 to sub $50. With prices at $50+, we grew over 200,000 bodp in 2017. We are on pace to break the DEC14 peak later this year.

  19. Anonymous on Fri, 23rd Mar 2018 4:12 pm 

    The US overall already broke its recent (APR2015) peak and even broke its all time monthly peak from 1970.

  20. peakyeast on Fri, 23rd Mar 2018 4:48 pm 

    UCG:

    “Everything has to be tight,” he said. “You need the perfect sealing caprock, otherwise you can’t hold this pressure.”

    Extreme pressures, needing perfect sealing with no faults while burning the coal in situ and also being 100% sure that no small earthquakes should come – natural or otherwise.

    Yeah – as a last ditch effort before dying that sounds like a good idea to promote globally.

  21. Boat on Fri, 23rd Mar 2018 5:27 pm 

    All the world needs to do is hire Texas to develop Venz oil. Problem solved for decades. Add Nigeria, Brizil, Iraq, Iran, Russia, to the list and the world is good for 100 years. It’s not that were out of oil. Just human incompetence to get it to market. Mm just can’t grasp the Dynamics.

    My bet is just another boom and bust cycle with yet another peak to follow. Let’s finish this one off first.

  22. MASTERMIND on Fri, 23rd Mar 2018 6:07 pm 

    Boat

    To many “If’s”…

  23. MASTERMIND on Fri, 23rd Mar 2018 6:10 pm 

    Anonymous

    We passed the peak with a different kind of oil. And Ultra-light oil makes poor-quality gasoline that has to be put through an additional process (and cost) called catalytic reforming that boosts octane to sales specifications. And most crucial is that this light oil lacks the middle distillates needed to produce diesel and jet fuel. Those are the three biggest refined
    product markets so ultra-light oil has a lot going against it. Its not much of a substitute if it can’t do any substituting!

    Chevron CEO warns US shale oil alone cannot meet the world’s growing demand for crude
    https://www.cnbc.com/2017/05/01/us-shale-cannot-meet-the-worlds-growing-oil-demand-chevron-ceo-warns.html

    The IEA is grossly overestimating shale growth
    https://oilprice.com/Energy/Oil-Prices/The-IEA-Is-Grossly-Overestimating-Shale-Growth.html

    The Shale Gas Revolution Is A Media Myth
    https://oilprice.com/Energy/Natural-Gas/The-Shale-Gas-Revolution-Is-A-Media-Myth.html

    Peak U.S. Shale Could Be 4 Years Away
    https://oilprice.com/Energy/Crude-Oil/Peak-US-Shal

  24. MASTERMIND on Fri, 23rd Mar 2018 6:20 pm 

    ‘I’d beat the hell out of him’ says Joe Biden of Trump – video

    https://www.theguardian.com/us-news/video/2018/mar/22/id-beat-the-hell-out-of-him-says-joe-biden-of-trump-video

    https://imgur.com/a/YPozM

  25. MASTERMIND on Fri, 23rd Mar 2018 6:25 pm 

    Soon when the oil starts to run out people will be forced to eat their babies to stay alive!

  26. rockman on Sat, 24th Mar 2018 10:37 am 

    MM – “We need that heavy oil from Venz to mix without ultra light shale…” Almost correct: Vz needs US light oil/condensate in order to sell its heavy oil. Heavy oil that can’t been pipelined or shipped in tankers without first having its viscosity decreased. And that’s why last year Vz imported light oil/condensate from half way around the world from north Africa. Same reason the Alberta producers import about 130 million bbls of light oil/condensate from the US every year to make pumpable dilbit. Dilbit which then needs many millions of bbls of light oil/condensate to make blends required by our refineries. Same reason why for almost 10 years many hundreds of million bbls of Eagle Ford light oil/condensate have been shipped out of the port of Corpus Christi half way around the country to eastern Canadian refineries where it was used to blend with heavy oil imports.

    From last month:

    Reuters – “Venezuelan PDVSA’s refineries will operate at 43 percent of their total capacity in March due to a lack of spare parts, light crude and feedstock…The company’s refineries…have been hit by the OPEC-member’s oil output decline, leaving PDVSA short of the crude grades its facilities need to produce fuels for the domestic market and for export. A severe lack of cash stemming from export and production declines has led to delays in buying spare parts and equipment for needed maintenance, while limiting the volume of imported products, diluents and feedstock the firm can afford. PDVSA has ramped up its requests to buy imported crude and fuels on the open market since December. Last week it awarded tenders to buy Russian oil, gasoline blend stock, catalytic naphtha, vacuum gasoil, diesel and components for gasoline, according to offers seen by Reuters.”

    Venezuela may have many billions of bbls of heavy oil. But without access to many billions of bbls of light oil/condensate those reserves are nearly worthless. The Vz govt ignoring that FACT has led to the country current dismal condition. And sitting just a short sail away across the Gulf of Mexico is the world’s largest exporter of light oil/condensate.

  27. rockman on Sat, 24th Mar 2018 10:51 am 

    kiwichick – “…bottom line is we are not making any more fossil fuels” A point the cornucopians keep ignoring. Higher oil prices, such as we have TODAY, allow increased recovery of those EXISTING reserves. Higher oil prices that justify the use of expensive technology to recover those “new” reserves.

    There are no new fossil fuel reserves being generated today on time scale meaningful to mankind. Or even womankind. LOL

  28. Davy on Sat, 24th Mar 2018 11:00 am 

    “Venezuela may have many billions of bbls of heavy oil. But without access to many billions of bbls of light oil/condensate those reserves are nearly worthless.”

    YO BOB, did you read that?

  29. Cloggie on Sat, 24th Mar 2018 12:42 pm 

    From your source “The Aachen project is still theoretical. ”

    And eight years later it still is! LOL

    Because it ain’t necessary and hopefully never will! LOL

    (together we laugh a lot, laughing is good for your health.LOL)

  30. GregT on Sat, 24th Mar 2018 1:27 pm 

    ” Vz needs US light oil/condensate in order to sell its heavy oil. Heavy oil that can’t been pipelined or shipped in tankers without first having its viscosity decreased.”

    Accidental Discovery: Bitumen Pellets for Heavy Oil Transport

    https://www.spe.org/en/print-article/?art=3546
    http://www.cbc.ca/news/canada/calgary/bitumen-balls-pellets-pipelines-rail-train-transport-energy-alberta-technology-1.4277320

    A close personal friend of mine has been working on this project for the past several years. They already have a working ‘plant’, and are currently ramping up production.

  31. Anonymous on Sat, 24th Mar 2018 2:25 pm 

    ““Where oil is first found is, in the final analysis, in the minds of men.”

    -Wallace Pratt

    http://foundation.aapg.org/gia/pratt.cfm

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