Exploring Hydrocarbon Depletion
Page added on October 27, 2012
News stories in recent days have touted America’s recent surge in oil production, positing the US could produce more oil than Saudi Arabiaby 2020.
US oil production has indeed surged in recent years—to levels not seen since 1995. Because of falling US demand and the production surge, the US now imports just 40% of the oil it uses, down from 60% five years ago—the “smallest share in 20 years.”
Will the US be the globally dominant producer in 8 years? Maybe. Production is trending that way, but 8 years is a long time to forecast, and long-term forecasts are fraught with peril.
Just another reason you shouldn’t fear Peak Oil. Peak Oil (also known as Hubbert’s peak theory) is the idea that, eventually, oil production will peak and start falling. Hard to argue with that—crude oil is a finite commodity.
Yet, in some circles, it’s given way to panic. Folks who ardently believe in Peak Oil (capital P, capital O) believe the era of Peak Oil is upon us, or, worse, already passed. This (they believe) will usher in an era of economic stagnation and possible a forced return to subsistence living. (Google “peak oil” and you can find websites recommending how to prep your doomsday bunkers and learn to farm.)
And it does appear we’re past peak production—from conventional sources. For now. But don’t trade the Manhattan condo for a pair of horses and a plow just yet. For the last 30 years or so, known reserves of crude oil have only increased. (See the graph, which shows crude oil reserves in major oil-producing regions and the world overall.)
We’ve gone from 642 billion barrels of known crude reserves globally in 1980 to 1.34 trillion in 2009 (the latest available date from the EIA). If we’ve been consuming oil all the time, how can it be that known reserves have increased? Over double!
First, never believe a long-term forecast—anything can and will happen. Second, it would be hubristic to assume we could ever know exactly how much oil is recoverable at any one time.
That increased oil didn’t magically appear beneath the earth’s crust. Advanced technologies have made it possible to not just extract more oil from conventional sources previously thought tapped, but frack and deep-water drill in spots not even thought of 20 years ago. And they’ve also allowed us to locate more oil—in conventional and non-conventional spots. Very often, energy firms will search for as much crude as they believe economically recoverable at the current or projected price of oil. If they tap out (for now) a spot, or if fundamentals shift to make further exploration economical, they “search” for more.
Conventional production may have peaked. But as oil prices rise, that makes unconventional extraction more economical. As those methods mature, they become less costly (and, eventually, rather conventional), increasing supply and putting downward pressure on oil prices over time.
And if prices rise again (for whatever reason), certainly still more technologies can emerge to find/extract more crude—in both old-school conventional, new-school conventional and super unconventional spots.
Or maybe not! Maybe the world continues its trend of becoming less energy intensive, mitigating demand. Or maybe over the next 8, 10, 15 years the combustion engine becomes a relic. Just because subsidized “green-energy” firms have been going belly-up left and right doesn’t mean there isn’t now or won’t be a potentially profitable alternate to crude energy. Or multiple alternatives! Like natural gas, which is experiencing a full-scale US boom. Or maybe some combination of all these scenarios. Folks who fear an impending deleterious economic impact from “Peak Oil” must, by defintion, assume there will be no futher innovations that will increase supply, mitigate demand, drive down costs and/or change how we power our economy. That’s a dangerous (and historically baseless) gamble to make.
So, sure, the US might surpass Saudi Arabia in the next decade—maybe by a wide margin. But long-range forecasts based on today’s (or yesterday’s) static assumptions rarely prove true.
Markets Never Forget But People Do by Ken Fisher (CEO of Fisher Investments) and Lara Hoffmans is available now.
This constitutes the views, opinions and commentary of the author as of October 2012 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. No assurances are made regarding the accuracy of any forecast made. Past performance is no guarantee of future results. Investing in stock markets involves the risk of loss.