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Page added on December 14, 2013

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Inexpensive oil vanishing at alarming rate

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The United States is awash in shale oil. Iran, once OPEC’s second-largest producer, is slowly ramping up output. Oil consumption growth in the Western world has been somewhere between negative and flat since the 2008 financial crisis. The “peak oil” theory has pretty much vanished, along with The Oil Drum, the bible of peak oil believers. Rest in peace.

Or turn in your grave, for the oil price charts tell a different story.

On the New York Mercantile Exchange, crude oil futures are up 13 per cent over one year. Since 2009, they have climbed every year except 2012. In Europe, the Brent crude futures are flat over the year after rising three years on the trot. Brent, the de facto global benchmark, trades at about $108 (U.S.) a barrel; West Texas Intermediate, the North American benchmark, is at $97. For the sake of argument, let’s say the world is valuing oil at $100. You would think the price would be far less as the United States challenges Saudi Arabia for top producer status.

While the oil forecasters were pumping out bearish calls, the market itself has stuck to its triple-digit price outlook. Oil buyers apparently know the Western world’s economic recovery will boost consumption, since growth and oil use are aligned. That’s not all. They also know that the math doesn’t work: Prices can’t go into gradual, long-term decline, or even stay flat, when the world’s conventional oil fields are in fairly rapid decline.

Exotic production – oil sands, biofuels, natural gas liquids – are supposed to fill the gap. But this so-called unconventional production is highly expensive and quite possibly insufficient to cover the drop off in cheap, conventional production. Prices will rise to the point that demand will have to level off or fall. The “peak oil” and “peak demand” theories are really opposite sides of the same coin.

A few days ago, Richard Miller, the former BP geochemist turned independent oil consultant, delivered a sobering lecture at University College London that laid out the case for dwindling future oil supply. His talk was based on published data from the U.S. Energy Information Agency, the International Energy Agency, the International Monetary Fund and other official sources.

The data leave no doubt that the inexpensive oil is vanishing quickly. Conventional oil production peaked in 2008 at about 70 million barrels a day and is declining by about 3.3 million barrels a day, every year. Saudi Arabia pumps about 10 million barrels a day. The math says a new Saudi Arabia has to be found every three years to offset the conventional oil drop off. Good luck. Now you know why Russians, Canadians and Americans are so keen to lock up the Arctic, the alleged keeper of vast new reserves.

About one-quarter of conventional production comes from the 20 biggest fields and most of them are in decline, some precipitously. North Sea oil production peaked at 4.5-million barrels a day in 1999. This year’s production is forecast at between 1.2 million and 1.4 million barrels a day. The so-called Forties field, the North Sea’s biggest, has been losing 9 per cent a year for more than 20 years. Ditto two other North Sea biggies – Brent and Ninian.

Great Britain shed its status as an energy powerhouse about a decade ago, when it became a net energy importer. Its energy import bill is horrendous. Last year, Britain spent almost £22-billion ($38-billion) buying foreign oil, natural gas and coal.

Repeat all over the world, from Mexico to Indonesia. Indonesia’s oil production has been in steady decline since the mid-1990s, and the country has gone from oil exporter to importer, at which point it got kicked out of the Organization of Petroleum Exporting Countries. While new exploration and technologies will extend the life of some of the gasping old fields, the long-term downward trend is intact.

The conventional fields are running out of puff just as world demand is climbing again, which can only put upward pressure on prices. This week, the IEA estimated that oil demand will rise by 1.2 million barrels a day in 2014, or 1.3 per cent, to 92.4 million barrels.

The increase is driven by economic recovery and ever-rising demand in China and elsewhere in the developing world. China is willing to pay almost any price for oil because oil drives growth more than it does in the West, where energy use is less intensive per unit of economic output. China has also developed a love affair with traffic jams. The number of cars and motorbikes in China increased twentyfold between 2000 and 2010. It is forecast to double again in the next 20 years.

The oil shills, the tech geeks and most, but not all, oil companies would have you believe that non-conventional energy will fill the gap as the cheap, easy-to-pump oil heads gently into the night. It might, but at what price and cost to the environment? Or it might not at any price.

Deep-sea production is monstrously expensive and risky, as BP found out when its Macondo well in the Gulf of Mexico blew up. The Alberta oil sands also spew out more carbon dioxide than conventional production. Most biofuels, such as U.S. corn-based ethanol, are taxpayer-subsidized economic horror shows with dubious environmental benefits.

The peak oil crowd has thinned out, to be sure, but it won’t disappear. Gushing U.S. shale oil doesn’t mean oil is about to become cheap and plentiful. The fall off in conventional oil production is real, and scary.

Globe and Mail



27 Comments on "Inexpensive oil vanishing at alarming rate"

  1. J-Gav on Sat, 14th Dec 2013 12:59 pm 

    Ah, somebody has noticed …

  2. mo on Sat, 14th Dec 2013 1:32 pm 

    Depletion. The monster begins to eat its own tail

  3. rockman on Sat, 14th Dec 2013 1:35 pm 

    Here’s the simple question: what is “cheap oil”? Is it priced at $60/bbl or $40/bbl or $10/bbl? But in what time frame: in 1978 oil selling for $35/bbl and was considered very expensive.

    Or is “cheap” a function of what one can afford? Consider: was oil cheap in the mid 80’s when it was selling for less than $20/bbl? The great majority of oil consumers couldn’t afford oil at that price and thus consumption plunged. So it was cheap yet unaffordable for many. And today oil is “expensive” and yet the consumers can afford to buy more oil then ever before in history.

    Or is “cheap” referring to what it cost to find and not what it’s selling for? But that answer isn’t as obvious as it seems. So an operator sells his shale oil for $95/bbl and it costs him $70/bbl to develop it. So a simplistic metric: he made $25/bbl. In 1979 I sold some oil for $35/bbl that cost me $5/bbl to develop. Who made a better ROR?

    So let’s focus on the concept of “affordable oil”. Is oil affordable today? Depends on who you’re asking. For the consumers buying more oil today the ever before obviously it is otherwise they wouldn’t be buying. And for some, like many of the citizens of the PIIGS, it isn’t. But oil was not affordable for more folks in 1986 when it was selling for less than $15/bbl and thus consumption crashed.

    One more consideration: the KSA is selling a lot of oil today for $90/bbl that cost them only a few $’s to develop. It’s probably costing more than that to cover production costs. OTOH they are developing some new reserves that could cost $80/bbl or more. So will future KSA oil be cheap or expensive? Will it be affordable or unaffordable? Affordable for how many consumers?

    So now that I’ve rattled off some thoughts: is oil currently cheap or expensive? Affordable or unaffordable? Or does trying to tag the price of oil with a simplistic quantifier a tad pointless?

  4. Ron Patterson on Sat, 14th Dec 2013 2:02 pm 

    @ Rockman
    Rockman, everything you say is true but you are missing the point. You are fussing about semantics when the article announces the return of Peak Oil. The low hanging fruit is swiftly vanishing and what must replace it is very expensive and sometimes even dangerous.

    Also the very high energy bills countries are having to pay for imported oil is killing their economies right at the time they are trying to recover from the deepest recession since the 1930s.

  5. paulo1 on Sat, 14th Dec 2013 2:36 pm 

    Ron makes a great point and probably the key point for most folks. However, I look at the price of oil as to what it can do for us…what it can accomplish with judicious and careful use; that the resource and environment requires. $200 is still cheap in my books. We just have to live differently.

    Having said that, higher prices will probably collapse the swing set and prices will again plunge…but no one will have the money to buy much of anything at any price. As my Dad used to say about the Great Depression, “we had lots of food, we just didn’t have any money”.

    Paul

  6. shortonoil on Sat, 14th Dec 2013 5:36 pm 

    There is a calculable theoretical maximum price that can be paid for petroleum. It is determined by evaluating the amount of economic activity that a unit of oil can generate. In 2012 that number was $460/barrel. Of course, the probability that this upper limit can ever be reached is invisibly small. Many other factors will affect the ultimate price. Such as, at what point does the debt based currency system collapse. Without growth our present system can not be maintained. The question is then really a matter of, “at what price does growth stop”. How long after that will it be before the economic system has deteriorated to the point that it will no longer be possible to produce petroleum and its products?

    Gail Tverberg has estimated that $100/barrel is the maximum that a growing society can tolerate. Looking at the present state of the world’s economy it seems that she is probably not far from the mark. Our analysis indicates that it will probably be in the range of fifteen to twenty years after that when the majority of petroleum production will cease.

  7. Ghung on Sat, 14th Dec 2013 5:44 pm 

    “….would have you believe that non-conventional energy will fill the gap as the cheap, easy-to-pump oil heads gently into the night. It might, but at what price and cost to the environment? Or it might not at any price.

    Firstly, most folks don’t have a clue as to the shear utility that cheap oil has provided to economies and societies at large, and won’t fathom the scale of our addiction to this one time endowment of immensely useful energy and chemical source.

    As for affordability; the proof of oil’s importance will be found in our willingness to sacrifice to support that addiction. ‘Affordability’ is relative to the level of needs and wants. I submit that the global economy is already in the triage phase, robbing Peter to pay its fuel bill while discovering that substitutes won’t give the quality energy buzz that oil does. The master resource, indeed. Getting this monkey off our back will be messy. We’ve invested in too many of the wrong things for too long. Still are.

    Maybe it’s starting to sink in, but I think we, collectively, have a big problem with the scale of this thing.

  8. Dave F on Sat, 14th Dec 2013 5:45 pm 

    Well, inexpensive oil alone does not explain the situation that has developed in places like Iran and Saudi Arabia. These countries cannot run their governments on oil less than $90. This means the inexpensive oil has to be sold expensive in effect most inexpensive oil is expensive because of above ground issues

  9. penury on Sat, 14th Dec 2013 6:14 pm 

    In my opinion the problem is not cheap oil. The problem is cheap money. Currently the Central Banks are creating currency from air at a rate higher than that being created by actual production.In 2013 the U.S will create(admitted)1.2 trillion dollars, EU about the same. China we do not know and Japan about twice the U.S. As humans we will utilize every drop of oil no matter the cost, to the envirome3nt, our own health or the health of the world. Currently the U.S. government is engaged in spending the equivalent of the created money for military actions to assure the procurement of resource supply and the ability to control the pricing by other producing nations. If the petro dollar ever is successfully challenged I think this discussion will be over. And by the way: when I started my first paid job the minimum wage was fifty cents an hour-gasoline was 25 cents a gallon. Currently the minimum wage is 11.00 an hour (approx) and gas is 3.25, where is the expensive gas?

  10. Dave Thompson on Sat, 14th Dec 2013 6:31 pm 

    This article is a great summery of the issue at had.

  11. rockman on Sat, 14th Dec 2013 6:33 pm 

    Ron – valid points but consider:”You are fussing about semantics when the article announces the return of Peak Oil.” Just the opposite IMHO. That was the point I perhaps didn’t make clear. The semantics are not relevant. There is no such thing as “cheap” oil but there is “cheaper” and more expensive oil. There is no such thing as unaffordable oil either: there’s oil some can afford to buy that others can’t. At the time a bbl of $100 oil is both cheap and expensive…both affordable and unaffordable. That’s why I say such simplistic semantics are meaningless: the is no such thing as “cheap oil” in the absolute IMHO.

    “The low hanging fruit is swiftly vanishing and what must replace it is very expensive and sometimes even dangerous.” Depends on your point of view. As you know I’ve been hunting oil for 38 years and I’ve never seen much easy low hanging fruit harvested. In the late 70’s I watched a great many companies spend themselves into bankruptcy looking for that “easy oil”. Granted the conventional onshore fields discovered 40 or 50 years ago were bigger than what we have today but they weren’t easy to find. In fact, exploration tech is magnitudes better today then back then. Yes: conventional oil/NG is much easier to find today as witnessed by the higher success rate. When I started in 1975 if a geologist had just a 1 in 5 success rate he was considered a super star. You do remember my story about the JV in the late 70’s that drilled 18 drill holes in a row…not a single completed wildcat. Where was that low hanging fruit then? LOL.

    And what happened to many of the companies that did find some oil during those boom times? I personally watched at least 15 of the disappear forever when prices crashed in the mid 80’s. Much of the “cheap” oil reserves they developed turned out to be too damn expensive in the 80’s.

    “Also the very high energy bills countries are having to pay for imported oil is killing their economies right at the time they are trying to recover from the deepest recession since the 1930s.” Yes…just as it was in the mid 80’s when oil was “cheap”. It took about 20 years of relatively cheap oil to lead to that recession. But there are economies buying a record breaking amount of this not “cheap” oil today…much more than when oil was “cheap” during the last 30 years,

    No low hanging fruit these days??? LOL. That’s exactly what the Eagle Ford Shale is. I don’t recall a moment in the last 38 years when geologist had an easier time getting their prospects drilled as the shale players have it today. For the most part companies don’t even worry about what a geologist’s map looks like. They take leases and drill wells with a specify orientation, run csg, frac and then produce them. I’ve seen geologists spend a couple of years to get one conventional wildcat drilled. Several years ago I talked to a “shale” geologist working for SW Energy. He was cranking out one new location to drill every 10 days or so.

    One might say those shale wells might not produce as much oil as a conventional well from decades ago. So how much oil did those 18 conventional dry holes produce? LOL. OTOH consider the DW GOM fields being developed today. Huge capex for sure. But consider such a field with only 100 million bo that cost $2 billion to produce. That’s $20/bbl oil. A shale player would give up his first born for such a deal. LOL.

    And lastly, I just drilled a 150 bops well in a field that was discovered 66 years ago. Drilled between 4 of the original DEPLETED wells. I didn’t even have to draw a map…used one published 30 years ago. Rather low hanging, eh? LOL. All it took was someone to believe I wasn’t nuts. And $100/bbl oil, of course.

  12. rockman on Sat, 14th Dec 2013 6:44 pm 

    Ghung – And that’s the really worries aspect IMHO: not just energy but how much of our lives are being floated on debt and “monetary easing”. Sorta like the woman arguing her account can’t be overdrawn because she still has checks in her book. Or someone claiming they don’t have a credit card problem because they can still make the monthly minimum payment

  13. mo on Sat, 14th Dec 2013 8:22 pm 

    What is cheap oil? I guess it all depends on your income. Someone who makes a lot of or has a lot of money isn’t that worried about the cost that much at this point. As for the rest of us, we just keep getting pushed closer and closer to the margin, or over the edge if the income isn’t there

  14. GregT on Sat, 14th Dec 2013 8:54 pm 

    “There is no such thing as unaffordable oil either: there’s oil some can afford to buy that others can’t.”

    But there is such a thing as oil that is unaffordable to a continuous growth based economy. When that point is reached, austerity, inflation, and monetary ‘stimulus’ will be the new norm. (Exactly like what we are already experiencing.) Followed by more and more of the same, until the monetary system can no longer function.

  15. westexas on Sat, 14th Dec 2013 9:02 pm 

    My usual comment about higher annual oil price highs and higher annual oil price lows:

    We have of course seen a cyclical pattern of higher annual highs and higher annual lows in global (Brent) crude oil prices in recent years, but I think that the rates of change between successive annual price lows, or troughs following annual oil price peaks, is very interesting. 

    Cyclical Peak to Trough Annual Brent Crude Oil Prices, 1997 to 2013

    1997: $19
    1998: $13

    2000: $29
    2001: $24 (1998 to 2001 rate of change: +20%/year)

    2008: $97
    2009: $62 (2001 to 2009 rate of change: +12%/year)

    The 11 year 1998 to 2009 overall of change in trough prices was 14%/year.   And then we have 2012 to 2013.

    2012: $112
    2013: $108 (Est. price)

    Based on estimated price for 2013, the four year 2009 to 2013 rate of change in the trough price would be 14%/year ($62 to $108). 

    The long term 15 year 1998 to 2013 rate of change in trough prices would also be 14%/year ($13 to $108).

    If the (+14%/year rate of change) pattern holds, and we were see a year over year decline in annual Brent crude oil prices in 2017, it would be down to an annual Brent price of about $190 in 2017.

    Following is an an excerpt from a recent OECD study which forecasts sharply higher global crude oil demand (and potentially) much higher oil prices:

    “A return to world [economic] growth to slightly below pre-crisis rates would be consistent with an increase in the price of Brent crude to far above the early-2012 levels by 2020. This increase would be mostly driven by higher demand from non-OECD economies – in particular China and India. The expected rise in the oil price is unlikely to be smooth. Sudden changes in the supply or demand of oil can have very large effects on the price in the short run.”

    Source:  http://www.financialsense.com/contributors/joseph-dancy/oecd-study-forecasts-sharply-higher-global-crude-oil-demand

  16. shortonoil on Sat, 14th Dec 2013 9:04 pm 

    “What is cheap oil?”

    “So long as oil is used as a
    source of energy, when
    the energy cost of recovering
    a barrel of oil becomes
    greater than the energy content
    of the oil, production
    will cease no matter what the
    monetary price maybe.”
    (M. King Hubbert)

    What is expensive oil? It is when oil can no longer act as an energy source – and that is a determinable point.

  17. westexas on Sat, 14th Dec 2013 9:05 pm 

    Global and Available Net Exports of oil

    GNE/CNI* Vs. Annual Brent Crude Oil Prices for 2002 to 2012:
    http://i1095.photobucket.com/albums/i475/westexas/Slide1_zps5f00c6e5.jpg

    GNE/CNI Vs. Total Global Public Debt for 2002 to 2012:
    http://i1095.photobucket.com/albums/i475/westexas/Slide2_zps01758231.jpg

    GNE/CNI Decline Extrapolated to 2030:
    http://i1095.photobucket.com/albums/i475/westexas/Slide1_zps9ff3e76d.jpg

    *Definitions:
    GNE = Combined net oil exports from (2005) Top 33 net oil exporters (total petroleum liquids + other liquids production, EIA)
    CNI = Chindia’s Net Imports of oil (EIA)
    ANE = Available Net Exports = GNE less CNI

  18. jmm on Sat, 14th Dec 2013 10:18 pm 

    What I miss is
    That much more oil is produced than ever before.
    So the production costs decrease with larger quantities.

    Also, the gain increases with higher flow velocity through.

    And imagine you are an oil sheik.
    and who wants to be rich during his lifetime.
    What comes next is nothing interests him.
    Therefore cheaper to provide the oil you get a higher flow rate.
    So more money.
    That oil is running out faster than so does not matter.
    It is easy money.

  19. shortonoil on Sat, 14th Dec 2013 10:19 pm 

    Over at Ron’s site (http://peakoilbarrel.com/) he brings up the point that Bakken LTO has declined in price by $20/barrel in the last four months. They seem to be at a loss for an explanation, as this is much more than WTI has declined. A simple explanation is that the Bakken has tapped out its market.

    Very little of LTO is suitable for distillate production; it lacks the C7+ molecules needed to produce it. The great majority of it is used as a diluent for Canadian bitumen, and as a feed stock for other chemical processes. Bitumen production in Canada is not increasing, and the world only needs so much feed stock. In essence we have reached “Peak Plastic Cup”.

    Perhaps all the hype about the “Miracle of the Tight Oil” will soon come to an end!

  20. energy investor on Sat, 14th Dec 2013 11:01 pm 

    Just think about the UK going from being a major energy exporter in 1999 with a huge positive export income from energy exports to a negative of GBP22 billion. It is the size of the turnaround rather than absolute cost of imports that destroys them. Same with Yemen, Egypt, Indonesia and Syria.

  21. shortonoil on Sat, 14th Dec 2013 11:47 pm 

    WestTexas,

    If China’s percentage of globe exports is going down, then where is the rest of it going?

  22. BillT on Sat, 14th Dec 2013 11:48 pm 

    NET energy is the number that counts. Not dollars. If we were still pumping oil at 1 barrel of energy cost per 99 barrels of energy recovered, it would be ‘cheap’. Now, we are paying for 100 barrels but only getting 90 or less. Soon we will be paying for 100 and only getting 50 or less. I doubt we will get that far before the whole game crashes and burns.

  23. shortonoil on Sat, 14th Dec 2013 11:50 pm 

    Sorry, that GNE/CNI. Not the other way around!

  24. shortonoil on Sun, 15th Dec 2013 12:04 am 

    “Now, we are paying for 100 barrels but only getting 90 or less. Soon we will be paying for 100 and only getting 50 or less.”

    In 1930 the consumer got 98% of the energy that is in a barrel of oil. In 2012 it was 29%. It won’t be long before the “average” barrel will be zero! Then all that will be left will be the tail of the curve.

  25. Feemer on Sun, 15th Dec 2013 3:29 am 

    Doesn’t matter if $100 oil is cheap (it is compared to the price our climate/environment pays). Anything more than $120 or $130 is going to hurt the economy, especially as conventional oil is displaced by fracking and tar sands. Simmons got it right, the sun is setting. I don’t know how much longer this will all last. Europe is already having energy crises, the US can buy itself a few more years but the fracking boom will be over by 2020. Business as usual is going to end soon, and when it does the world is either a) going to collapse, or b) just decline and decline to a system of powerless governments, broken down institutions, and a place where you really are going to have to be self sufficient.

  26. rockman on Sun, 15th Dec 2013 12:39 pm 

    Greg – “But there is such a thing as oil that is unaffordable to a continuous growth based economy.” Or turn it around: an economy that can afford oil regardless of the price can still grow or at least maintain itself. Which isn’t the same as BAU for everyone but those that can afford the oil they have the capability of BAU. We’ve had high priced oil for a while but much of the US economy is running BAU. Again consider when oil was less than $20/bbl in the mid 80’s it wasn’t affordable for many economies since the world was in a severe recession. IOW when oil was the “cheapest” during the last several decades BAU could not be maintained by many. Now, with some of the most “expensive” oil for several decades not only are some economies are running BAU but some, like China, are booming.

    A complex dynamic that doesn’t lend itself well to simple tags such “cheap” and “affordable” IMHO.

  27. Newfie on Sun, 15th Dec 2013 6:53 pm 

    Never ending growth is a fairy tale that everyone believes in.

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