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Cheap Oil Does Not Mean That Peak Oil Is a Myth

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Peak oil is a fundamental tenet of the Transition Towns concept, but the current return of “cheap oil” has muddied the waters about how to discuss it.

At a recent meeting of Transition Town Reading (U.K.), we discussed the prevailing low oil price, and the group asked me to put together some salient points on the subject, set within the context of whether or not we can now dismiss peak oil, e.g. as it is currently being contested  here and here.

The following points are based on an article that I wrote on this blog which was re-posted on here.

Most of the references that I have drawn from are in the links posted there, with a few more added into the text below. Some of the points overlap with each other, but hopefully expand their perspective in so doing:

(1) Peak oil is NOT when oil runs out, but it is the point at which the maximum rate of production of oil is reached, globally. Beyond the peak, global production falls relentlessly. New technologies can extend the supply, but the cost of production rises accordingly.

(2) Peak oil is expected to happen as a result of geological/technical/ geopolitical factors, but it may also be that a very high price of production (mainly due to these factors) makes oil less affordable, reducing consumption, so production “peaks” for this reason.

(3) Different nations/regions will peak at different times, but “peak oil” refers to the global maximum.

(4) Over half of the world’s major oil-producing nations have passed their production peak.

(5) The decline in production rate from existing oil fields amounts to a loss of 3.5 million barrels a day, per year. To maintain overall supply (around 30 billion barrels per year), the equivalent of a new Saudi Arabia’s worth of production must be brought on-stream every 3 years or so.

(6) This (5) means that new production has to grow relentlessly, year on year, such that by 2030 (only 15 years time) we must install new production to the tune of around 5 Saudi Arabias.

(7) It is not only the (large) total of the oil that must be produced (200 billion barrels by 2030), but [reinforcing (6)] that the production rate of the “new oil” has to increase relentlessly to meet the decline from existing conventional fields.

(8) It is production rate that is critical, more than the size of the reserves. “The size of the tap, not the tank”. Of course, the oil has to be there in the first place, but it is how fast it can be got out of the ground that determines whether the overall global production rate can be maintained.

(9) The conventional fields being found now tend to be smaller than they were. The 20 largest oil fields in the world account for 25% of total global oil production, of which the majority are already in decline. “Giant”oil fields (those containing 500 million barrels or more) currently provide 60% of the world’s oil supply, but their discovery peaked decades ago.

(10) This means that most of the new production has to be from unconventional “oil” sources. These are more difficult and expensive to produce from, and have a lower energy return on energy invested (EROEI) than for conventional oil. This is likely to translate into lower production rates per unit of $ or unit of energy.

(11) There is an inverse correlation between EROEI and $ price for different oil sources, i.e. lower EROEI, higher $ price.

(12) Chevron have released a presentation for their investors [emphasising (10)] which indicates an expectation that 40% of the “new oil” will come from deepwater fields, 20% from U.S. shale, 10% from increased tar-sands production, 25% from OPEC growth (Venezuelan extra-heavy oil?), and around 5% each from shale outside of the U.S. (Russia?) and “onshore and shallow offshore”.

(13) Chevron also stress that production from these sources will not come cheap, and will probably be of the order of $100 a barrel (“Breakeven price” or “marginal cost”).

(14) Hence at under $50 a barrel selling price, these projects will not go ahead, or they will be money-losers (cost more to produce the oil than it sells for). This year, $150 billion worth of new projects may face the axe, which are mainly from heavy-oil, deepwater, tar-sands and shale-oil.

(15) Lack of new infrastructure now will mean a reduced production rate, a year or so down the line.

(16) So why is oil so cheap? There are various contributing factors relating both to supply (production rate) and demand. The main supply factor is that production of U.S. shale oil has increased rapidly to 3.5 million barrels a day, along with the renewed oil production from Iraq and Libya. Saudi produce one third of OPEC’s output, and this time they have refused to cut production because they want to keep (grow?) their share of the market.

(17) At the same time, demand has fallen because the global economy (especially China) has slowed down. Since everything we do uses oil, when an economy is strong the demand for oil goes up, and when the economy weakens, demand goes down.

(18) The result of (16) and (17) is a glut of oil. According to supply/demand considerations, the price goes down. It only takes 1% or so, in undersupply or oversupply, to push the price of a barrel of oil to above $100 or (as we have seen recently) down to $50.

(19) So, can we now forget about peak oil? No. Due to (5) and (14/15), the oversupply of oil will peter out. We still have the background global decline rate, so needing to produce a new Saudi every 3 years, and from unconventional oil, which is more difficult, tends to have a lower net energy return, and is expensive. Due to the current low oil price, new infrastructure is now not being built, meaning a further loss in production a year or so ahead.

(20) Then the price will then go-up again (supply/demand). But it has to, or producing much of the oil that is left would be a money-loser. The price has to go above the breakeven price (cost of production) for new investment to be worthwhile.

(21) The only way the price could maintain a sustained low is if the global economy continued to slow, so the demand not only didn’t grow but actually fell. This, naturally would have its own adverse consequences. If the price were to rise massively, e.g. to $150-200 a barrel, oil would become increasingly unaffordable, which would also reduce demand.

(22) So long as the selling price of oil stays above the“shut-in” price, existing production will mostly continue. If, however, it were to fall below this level (say, $20 a barrel), much global production would actually lose money, and be shut-down. This might reduce the world oil supply rapidly and massively, to the point that the world economy would stutter, and restarting both the oil production and the economy in its wider sense, might prove extremely difficult (worst case scenario!).

(23) While a low oil-price is seen by the consumers as a good thing., i.e. sales of Hummers and other SUVs are at a record high, because the fuel prices are low!, it’s no fun for the oil-producers. Saudi get 90% of their GDP from selling oil; Venezuela, 50%; Russia, 35%. To balance their national budgets, all these countries need oil at $100 a barrel. At $50, Venezuela may go bankrupt. Saudi has deeper pockets, and can hold out for longer. Russia is interesting, especially as they control much of the gas-supply to Europe. If they held it back, even for a week…

(24) While the return of a sufficiently high price may encourage new investment, it is unlikely that we can grow production of new oil to equal five Saudi Arabias within the next 15 years, especially from sources that are more expensive and more difficult to produce from than the oil they must serve to replace. Therefore, we can anticipate a contraction of the global oil supply within this timescale.

(25) Once the production rate of new (unconventional) oil can no longer match the rate of decline of conventional oil, the global production overall must decline, i.e. we will be at peak oil. How exactly this happens and when, will be determined by the interplay of the factors mentioned above, but to quote Fatih Birol (Chief Economist and Director of Global Energy Economics at the International Energy Agency in Paris):

One day we will run out of oil, it is not today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us, and we have to prepare ourselves for that day. The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously.”

(26) There is the climate-change aspect too, since burning oil contributes around one third of the carbon emissions that are due to human activities.

Energy Balance 

16 Comments on "Cheap Oil Does Not Mean That Peak Oil Is a Myth"

  1. Plantagenet on Wed, 4th Feb 2015 7:47 pm 

    Cheap oil doesn’t mean peak oil is a myth. It just means we are in a temporary global oil glut due to the large increase in US oil production from tight shale.

  2. bobinget on Wed, 4th Feb 2015 10:23 pm 

    That’s not all HRH.

    Eyes wide shut.

    Saudi Arabia, pretending to be our great friends and Allies in the process of crippling the US economy.

    OPEC members Libya, Nigeria and Venezuela’s economies are falling apart causing serious disruptions in forward oil deliveries to the US.
    China has stepped up to the plate and colonized
    while we were busy lobbing bombs at ‘terrorists”

    (Here’s a big known)
    You can bomb cities, even towns and villages, but you can’t kill off terrorist ideologues with bombs.

    KSA in collusion with western powers have literally
    given away the ‘farm’ to China.

    Venezuela can’t borrow money from anyone BUT China. China can now lay claim to all of Venezuela’s oil production minus domestic consumption and subsidized fuels to client states in Central America and the Caribbean.
    Bottom line. In short order the US will be looking
    for an additional one million barrels p/d to replace Venezuela’s exports.

    Ecuador is a similar situation. However small, under 500,000 per day, China will be receiving debt payments in oil once intended for USA.

    Take also the case of Libya now down below 100,000 B p/d from upwards to a million only six months ago. With no government funds, only China can save Libya’s chili.

    Syria is now a net oil importer.
    Egypt, the same. Without Saudi largesse, Egypt would collapse.
    Indonesia, net importers. Peaked ten years ago.

    South Sudan, the world’s newest country, racked with pain and suffering, has managed to slightly increase exports.

    If there were ever a grain of truth in the ‘tight oil as cause’, even HRH has to admit the collateral damage caused.

    Today we hear the US is upping the anti in Ukraine
    with intentions of sending in lethal military equipment turning Ukraine into yet another Syrian type proxy war.

    Jordan and Japan will soon try to settle US crude oil supply problems adding their not insubstantial military might. Both government leaders having vowed to revenge IS atrocities.

    So, lets add it all up;
    China gets Venezuelan and Ecuadorian oils by being lenders of last resort.

    The US and Russia entering cold war 3.0

    India’s economy booming, China resumes exports
    of oil once bound to the US.

    Iraq sustains casualties greater then at hight of war with US. IS moving on Iraq’s southern oil fields.

    Yeah, HRH, it’s all because high speed computers
    permitted multi hydraulic fracturing.

    I guess the next giant step in oil recovery will send
    prices to zero just as shortonoil predicts.

  3. GregT on Wed, 4th Feb 2015 10:32 pm 

    Two comments.

    One simple.

    One more complex.

    I wonder which one more closely resembles the reality of the world that we live in? Hmmm, tough choice.

  4. bobinget on Wed, 4th Feb 2015 10:45 pm

    EYES Wide Shut:
    We are headed for the mother of all oil shortages.
    To head it off at this stage we need to covert as much liquids fuel to gas or alternatives ASP…
    Withdraw from world oil wars at once.
    Try to recapture Ecuador and Venezuela peaceably.

    We we? No.

    If you or your mother believe any of my statements to be outrageous and untrue, look them up.

  5. bobinget on Wed, 4th Feb 2015 10:47 pm 

    (will we?) not wee-wee.

  6. yoananda on Thu, 5th Feb 2015 2:40 am 

    Oil is cheap, not because of oil glut but because of demand shortage.

    We may already be at peak oil right now, even if prices are low because we are in deflation.

    We will know for sure when either or both shale or a major (or their insurer) go banckrupt.

  7. meld on Thu, 5th Feb 2015 6:44 am 

    That’s why I got out of the transition movement. Most of the members really don’t understand what’s going on. They are mostly middle class environmentalists that use the ideas of climate change and peak oil to push forward an agenda of a better cleaner world. In other words they are just the other side of the coin that cornucopians live on. In reality we’re heading for a lifestyle not too dissimilar to the european dark ages.

  8. Davy on Thu, 5th Feb 2015 6:55 am 

    Good comment Meld and one I am onboard with. I will admit the transition corns are better than the BAU corns at a level of usefulness to a plan B. I am like you the dark ages are coming. No plan B will scale yet these transition corn folks still will be like monasteries of the dark ages by passing on something of value. The BAU corns are passing on a failed system. WTF good is that

  9. Rodster on Thu, 5th Feb 2015 8:24 am 

    As Gail Tverberg likes to say: “It’s baked into the cake”. As aside from oil there isn’t anything that can keep BAU and an infinite growth economic system along with infinite population growth continuing.

    Eventually it all comes crashing down. Let’s hope the best case scenario is a repeat to the dark ages and not as George Carlin used to say. “Pack your shit folks you’re going away, The will flick us off it’s back like a bad flea.”

  10. yoananda on Thu, 5th Feb 2015 10:06 am 

    +1 Meld … people don’t realize what peak oil is really about.

    We won’t be the first complex society to collapse but even though, I’m still astonished the little concern people have.

  11. shortonoil on Thu, 5th Feb 2015 10:33 am 

    The question itself is an oxymoron. The question should be will the world pump as much oil at $50/barrel as it did at $100? The answer to that is; “don’t be ridiculous”, of course it won’t! If the price does not go back up, production is going to go down. The only question now is how long will the marginal producer keep pumping in the face of $50 oil? They will keep pumping until the Repo man shows up to turn off the power, and collect their pump. If prices do not go back to $100 the world has hit its maximum ever production. Prices are not going back to $100:

    Prices are likely to go back to the $60s by the end of this year, but $60 is not $100. The price says it, our model says it, and the producers are not going to say it because soon a lot of them won’t be here any longer to say anything! If they are not here, they will not be pumping oil.

    A lot of people want to say that prices have fallen before. They fell in 1981, 1986, 2004, and 2011. Prices fell, and then rose. On a yearly bases prices fell the most in 2011, and that was 19%. Prices this time have been down for almost 8 months, and have fallen 55%. Comparing this decline with previous declines is an apple, and oranges comparison. It is like comparing a Moped with a Mac Truck.

    Depletion has taken its pound of flesh, and the victim is not going to survive. We hit Peak energy from oil more than a decade ago, we hit Peak conventional in 2005, we hit the energy half way point in 2012, and we will hit Peak junk oil this year. If it smells like a Peak, walks like a Peak, and sounds like a Peak; bet it’s a Peak!

  12. GregT on Thu, 5th Feb 2015 11:30 am 

    +100 Meld,

    Absolutely agree with your above comment.

  13. bobinget on Thu, 5th Feb 2015 12:23 pm 

    The following concerns US production.

    Nawar Alsaadi is a principal at Semper Augustus Capital, a private investment firm with a special focus on the energy sector. He is also a contributor to the financial press and the author of “The Bull of Heaven.” He currently resides in Vancouver, Canada. HardAssetsInvestor Managing Editor Sumit Roy recently caught up with Alsaadi to get his latest outlook on the crude oil market, including where to invest right now.

    HardAssetsInvestor: Crude oil prices have rebounded significantly since hitting a six-year low around $45 a few weeks ago. Is the bottom in, and how high do you see prices going in the near term and long term?

    Nawar Alsaadi: I believe prices have hit a bottom in the mid-$40s and will rise gradually in the next few weeks and months, but not without the casual setback as they eventually claw back their way to the $60s/$70s in the latter part of the year. Longer term, I don’t see price rising much beyond the mid-$80s as improved shale drilling efficiency and a strong dollar will prevent a return to triple-digit prices on sustainable basis.

    HAI: What do you make of billionaire oil investor T. Boone Pickens’ view that prices could return to $100 next year?

    Alsaadi: It is conceivable that oil prices may spike to $100 next year should oil shortages emerge due to the severe capex cuts undertaken by the oil industry worldwide combined with above-average demand growth due to low prices in 2015.

    However, any such spike will likely be temporary, as oil production will catch up to high prices before long, and especially so from shale producers in the United States. I do caution that the longer oil continues to trade under $60, the higher likelihood of a spike.

    HAI: The number of rigs drilling for oil in the U.S. has plunged, and oil companies are reducing their capital expenditures sharply. How much more will the rig count fall, and how will this ultimately impact U.S. production, which has surged during the past three years?

    Alsaadi: The rig count decline has a long way to go. A recent study by IHS indicated that more than half of U.S. shale production is uneconomic below $60 a barrel, and only a quarter is viable at $40 a barrel.

    Thus, as long as oil prices remain below $60, I expect the rig count to continue to decline, and such declines will likely accelerate in the coming months as producer hedges wear off. I expect the oil rig count to decline to around 800 or roughly down 50 percent from the peak by Q3/2015.

    I am quite confident that U.S. oil production will decline below 9 million barrels per day in Q3 or Q4 of this year. The Street is focusing exclusively on shale production, but the U.S. is still producing over 3 million barrels per day of conventional production. This production is taken for granted, but a decline of 10 percent in this category is entirely possible.

    In 1986, U.S. conventional onshore production declined by 11 percent within 10 months of the oil price collapse; I believe the quality and resiliency of this production has deteriorated considerably over the last 30 years. My projection is that U.S. production will exit 2015 at 8.7 million barrels per day, or roughly a 6 percent decline from where we stand today.

  14. bobinget on Thu, 5th Feb 2015 12:56 pm 

    Proving we here at Inget can chew gum and eat, I offered another view on domestic production not in conflict with shortonoil.

    My obsessions with oil wars are not confined to imports. I realize when ever a nation, any developed nation, get entangled with a half dozen conflicts far from ‘home,’ enormous energy will be wasted,
    maintaining such diverse fighting forces.

    Building bridges, railroads, houses or shopping centers or factory or apartment block provides long term employment for decades. Even an automobile
    needs ‘feeding’ and care for it’s useful lifetime.

    Building, transporting and releasing modern weapons uses the same amounts of energy.
    The former builds infrastructure, the latter destroys
    growth, culture and potential employment.

    Current western energy policy concentrates on
    conserving, protecting energy resources far from
    points of use. Until the West abandons 20th century policy of protecting despotic dictatorships
    attempting to match population growth in both source and consuming countries, conflicts are inevitable.

  15. Perk Earl on Thu, 5th Feb 2015 10:37 pm 

    “Oil is cheap, not because of oil glut but because of demand shortage.”

    Yoananda, maybe it should be called ‘demand void’. I think what happened was the world economy has in the past been flexible to rising supply and expanded to use that additional energy. However, at the price of oil before the recent drop, the world economy was closer to stagnant, so additional supply built up and is now a glut.

    Cause and effect, action and reaction. Higher volume, but less demand = glut. Some only see the effect, the reaction, but fortunately most on this site like you recognize the cause, the action, which is a ‘demand void’ to use extra supply.

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