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Page added on January 19, 2015
BP, Shell, And Petrofac: Why Peak Oil Theory Was Wrong
During the 1990s, the oil price was around $10-20 a barrel. Petrol was cheap and SUVs and gas guzzlers were selling in record numbers. Oil company share prices were low and there was next to no oil exploration. Yet wells from the North Sea to Saudi Arabia were still producing oil — after all, once an oil well has been drilled, the costs of actually pumping out hydrocarbons are marginal.
A perfect theory?
But since there were few discoveries of oil, and as current reserves dried up, production inevitably fell. Round about the turn of the century, inventories started to slide and oil prices began to rise. These rises gathered momentum and soon the oil price was reaching all-time highs, peaking at $147 a barrel. The effects of these high commodity prices rippled around the world.
The shares of companies like BP (LSE: BP.), Shell (LSE: RDSB) and Petrofac (LSE: PFC) soared. Lord Browne, at that time the chief executive of BP, was known as the Sun King, overseeing a series of takeovers and mergers which made the firm one of the world’s leading energy companies. Flush with cash, the Gulf states began an unprecedented spending spree, constructing iconic buildings such as the Burg Khalifa and the Burg Al Arab.
But why were prices rising so quickly? A ten-fold increase in the oil price seemed inexplicable. People heard about a theory proposed by US geophysicist M.K. Hubbert in 1956. It was called peak oil theory.
Peak oil theory says that fossil fuel production follows a roughly bell-shaped curve: production increases, peaks, and then decreases. Commodities theorists began to say that oil production had peaked. Soon peak oil theory was all the rage. This theory seemed to explain perfectly the price rises that were taking place.
A more prosaic explanation
But just stop to think about it. If oil production really had peaked, then surely oil prices would always remain high, as supply would fail to meet demand. This meant that oil company shares were a one-way bet, at least until their reserves began to deplete. But just this past few months we have seen oil, and other commodities, tumbling in price.
It seems that peak oil theory was actually wrong. High energy prices were really due to the commodities supercycle, a multi-decade cycle of supply and demand which has existed since oil was first discovered. And falling oil, gas and mineral prices are part of the end of this cycle.
The question is, how could we have been so wrong? Well, what strikes me is that we tend to over-rationalise. And if we have a choice between a dramatic explanation, and something more prosaic, I know which we will always choose. People have talked about the end of the world, and of imminent calamity, time and time again. Yet the sky still hasn’t fallen in. Yet these explanations appeal to our inner Chicken Little.
I prefer an optimistic explanation: when faced with a shortage of oil, the world has reacted by seeking out oil in the depths of the ocean and the far reaches of the Arctic, by extracting petroleum from the tar sands of Alberta, and by the shale revolution. When faced with a challenge, never underestimate humanity’s ability to innovate.
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15 Comments on "BP, Shell, And Petrofac: Why Peak Oil Theory Was Wrong"
gordianus on Mon, 19th Jan 2015 6:51 am
“But just stop to think about it. If oil production really had peaked, then surely oil prices would always remain high, as supply would fail to meet demand.”
Of course, the laws of Economics are infallible so if something happen which seems to contradict Economics, then the cause must be a flaw in the laws of Physics or Geology.
Total nonsense.
Newfie on Mon, 19th Jan 2015 6:56 am
When oil production peaks, oil prices skyrocket. When the price of oil prices is too high,it becomes unaffordable, and the economy splutters and crashes. The demand for oil evaporates, and there is an oversupply of oil. The price of oil then plunges. Sound familiar ?
Plantagenet on Mon, 19th Jan 2015 6:59 am
Conventional oil production HAS peaked. But M K Hubbert and other peak oil theorists never dreamed that millions and billions of bbls of oil could be produced by fracking tight shale
rockman on Mon, 19th Jan 2015 7:11 am
“But M K Hubbert and other peak oil theorists never dreamed that millions and billions of bbls of oil could be produced by fracking tight shale”. Of course he knew the potential for other trends to be developed. He actually points out that possibility in his original work. In fact, if memory serves me, he did mention the potential for new offshore trends.
But as he also clearly points out his US production curve applied to just the oil trends that had been developed over the previous decades. Which, if one takes the time to look at those trends today, Hubbert has been proven correct. And lastly one should remember that a “bell shaped curve” doesn’t imply a symmetric curve. Those fields that Hubbert used in his model have provided a very long tail and thus a rather asymmetric curve. Which is obvious when one remembers that the average production rate of US oil wells is less than 10 bbls per day. Many of those wells are the legacy of the fields Hubbert’s stat was based upon.
ghung on Mon, 19th Jan 2015 7:42 am
Is that where we’re headed, Rock? A million stripper wells producing a couple of million barrels a day?
shortonoil on Mon, 19th Jan 2015 9:24 am
“But just stop to think about it. If oil production really had peaked, then surely oil prices would always remain high, as supply would fail to meet demand.”
This statement would only be true if the value of oil had remained constant. It hasn’t! In 1973 Volvo was manufacturing the P1800. A sporty little car with a 10.5:1 compression ratio, that got 43 mpg, and would do 160 mph. When I was in college I had one. The car brand new sold for $5,200. To build the P1800 took energy. If all the energy used to build that car had come from petroleum it would have taken 48.1 barrels of oil in 1973. If that same exact car had been built in 2014, and all the energy to build it had come from petroleum, it would have taken 91.1 barrels.
The ability of a barrel of oil to build a P1800, or anything else in the economy is going down. As it does its value to the economy is going down with it. If oil production really had peaked, then surely oil prices would always remain high is simply flawed logic. The author is comparing apples, and oranges and coming up with kumquats; and then insisting that it proves his point. To analyze petroleum production requires a knowledge of the value of a unit of petroleum – and that is where most analysts fail.
We have put a page up at our site that shows how the value of a barrel of oil to the economy is declining:
http://www.thehillsgroup.org/depletion2_022.htm
It shows what the economy can afford to pay for it. As the oil age approaches its conclusion expect a lot more apples to kumquat comparisons. AND, if you ever get a chance to drive a 10.5:1 compression ratio P1800 don’t test its top end. Trust me, if you survive you’ll scare the hell out of yourself!
http://www.thehillsgroup.org/
GregT on Mon, 19th Jan 2015 10:20 am
“Conventional oil production HAS peaked. But M K Hubbert and other peak oil theorists never dreamed that millions and billions of bbls of oil could be produced by fracking tight shale”
Somewhat irrelevant Plant, if those millions and billions of barrels are unaffordable to society. They may as well be on Mars.
Plantagenet on Mon, 19th Jan 2015 10:27 am
@gregt
Your assumption that oil prices will stay low is questionable. The current oil glut and concomitant low oil prices are likely to be temporary, IMHO
SugarSeam on Mon, 19th Jan 2015 10:41 am
^ Plant, your opinion, such as it always is, doesn’t ever seem to be “humble.”
How do you continue to gloss over short and rock’s posts day after day? Do they even register with someone like you?
You can champion unconventional reserves each and every day if you like. But that says nothing of the reality of advanced societies’ unwillingness to pay for expensive, crap-grade oil.
How can someone like you come to a peak oil site every single day, and not have a grasp of the basic dynamics at play?
shortonoil on Mon, 19th Jan 2015 10:54 am
To bring prices back to the curve:
http://www.thehillsgroup.org/depletion2_022.htm
will require that about 4mb/d be taken off line. We don’t expect that to happen until late 2016 when prices return to the low to mid $60 range. The model has had a 4.5% margin of error over the last 49 years. We are certainly not going put much credibility into simple opinion that has historically had almost no track record when compared to the Etp model’s long term projections. When others can show a similar performance, we will take a look at their results.
Until then, we will assume that they are talking for the sake of talking!
http://www.thehillsgroup.org/
Charlie Bucket on Mon, 19th Jan 2015 11:05 am
“never underestimate humanity’s ability to innovate.” I don’t. I am always impressed with the humanity’s ability to innovate better am more efficient ways to destroy the planet! And that is all we are doing people! We are willingly and knowingly shitting all over the only place there is to live for light years around. Doesn’t make us very smart now, does it?
GregT on Mon, 19th Jan 2015 11:07 am
@plant,
Your assumption that I have assumed that oil prices will stay low is ridiculous. Just like 90% of everything else that you write. I suspect that oil prices will rise again, causing more irreparable damage to our economies, and leaving more above ground oil unaffordable to society. All of the oil in the universe will do us absolutely no good, if we can’t afford to pay for it.
Your ridiculous stance that we are in an ‘oil glut’ is one of the dumbest comments that I have ever read here on PO.com.
ghung on Mon, 19th Jan 2015 11:17 am
…“never underestimate humanity’s ability to
innovateignore the consequences of their innovations….”Fixed it.
drwater on Mon, 19th Jan 2015 2:38 pm
Plant,
Don’t you need to adjust your dollar figures into some sort of base year (i.e. inflation adjusted)?
Go With that on Mon, 19th Jan 2015 4:31 pm
Most of you posters are laughable. Step back and read what you have posted, digest these statements. Conspiracies lurk under every rock, or barrel of fine Canadian synthetic crude. Our society will continue to use petroleum products until such time as a viable replacement is available, which has not surfaced or magically appeared. There has never been a commodity that stores as much energy that can be easily provide the BTU’s to turn the wheels of development. Oil will contnue to be more expensive on average. All consumers will continue to buy and use, even when the price approaches $300 + a barrel. Once one of you inspired thinkers have that magic alternative energy source, wake me up because until then the global economy will continue to trek on similiar as the 100 years.