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Peak Oil Has Officially Peaked


The idea that we will use up all of the earth’s oil has just gone from extreme to ludicrous.

According to a new report by BP plc (BP), the oil game has significantly changed over the last few years.

What you thought you knew about how the oil industry works is wrong. But that doesn’t mean we are in any worse shape than before. However, if you are even thinking about getting into today’s incredibly low-priced oil company’s stocks, you need to pay attention.

BP’s report, titled “New Economics of Oil,” lays out why conventional thinking about oil production and prices is all wrong.

For starters, the “Beverly Hillbillies” idea of get-rich-quick oil finds is over. Oil is not something that is found in huge quantities that can be traditionally drilled for decades anymore.

Geologists have gotten darn good at finding the big fields, leaving new ones in short supply.

So, according to BP’s Spencer Dale, instead of the big oil finds and decades of production, the industry is now turning into a more “manufacturing-like” process. Here’s what that means.

Conventional wells and fields are still the breadwinners in the industry. That’s where the huge multinationals still compete — companies like ExxonMobil (XOM), Chevron (CVX) and even the author of this report, BP.

However, with the thousands of independent “fracking” and unconventional operators, especially in the U.S., production is more flexible.

Back when these new techniques really started taking off — about a decade ago in the U.S. — traditional drillers stayed away from them because of the short-term benefits of those technologies.

That is, the total production from shale oil wells drops off the chart after the first year.

As you can see in this chart, after the first year, production in the Bakken shale basin dries up by 75% after the first year. Meanwhile, in the Gulf of Mexico — something BP knows a thing or two about — production takes nearly a decade to slow that much.

But that doesn’t mean there’s no value in short-lived wells.

You see, for a company like BP to begin production at a traditional onshore — or even offshore — site, it takes years and sometimes decades to get the permits … buy and construct the platforms and equipment … and reach peak production levels.

For an unconventional independent driller, they can just pick up their equipment from a well that has already fallen 75% in production and move it a few miles down the road. It can begin producing within a year already at that site’s peak levels.

Shale producers don’t have to build new equipment. They don’t have to go through the same regulations and restrictions — simply because most of these sites were already used once when they could produce conventional oil. And they can move down the road at any time they please.

That flexibility lends itself to a more sustained approach to production. Unfortunately, these producers boomed too much right out of the gate.

If you haven’t seen the effect of shale production for total U.S. output, take a look here:

But with the most recent price collapse in oil, that period is over. Producers are starting to make more economic choices on where to drill and how much to produce.

As the U.S. Energy Information Agency and more recently OPEC predicts, next year will be the first year since 2008 that U.S. oil production falls.

But this shale trend isn’t going away.

For starters, just because we had record-breaking production growth over the last decade here in the U.S. doesn’t mean these shale producers have used up all that new recoverable oil. In fact, according to this BP report, “total proved reserves of oil … are almost two-and-a-half times greater today than in 1980.”

When oil prices recover — and nearly everyone agrees they will — shale will be back in business. But instead of flooding the market with excess oil, as many believe it has, it will be used as a buffer to both take advantage of higher prices and to keep up with demand.

Essentially, shale will smooth the price volatility going forward. That’s what BP means by a more “manufacturing-like” industry.

Conventional drillers will continue to produce their large oil fields for decades on end. And shale producers will get in when demand and prices are high and out when supply catches up.

That doesn’t mean we won’t see the kind of volatility we all have grown accustomed to in the oil industry going forward. In fact, at times, it could be worse than ever.

You see, traditional drillers like Exxon and Chevron are loaded with cash. They also have international operations that give them geographic diversification. So their cash flows and balance sheets can sustain periods of tight credit — like we saw in 2008-’09. Sure, those companies saw their share prices cut with the rest of the market, but you didn’t see Exxon go bankrupt.

The opposite is true for independent shale producers. They tend to be far smaller and have lower margins. So if credit becomes tight again — say, if interest rates rise too fast — they will suffer. They won’t be able to expand enough to cover their short-term production issues.

So imagine a scenario where the Fed raises rates just when oil begins to recover. If the Fed goes too fast, these shale producers will need credit the most at just the time when it becomes harder to come by.

This brings us back to a theme we’ve hit on pretty regularly over the last few weeks (here and here). There’s a great opportunity in the market for a massive consolidation in the oil industry.

Those large companies have the cash and motivation to begin scooping up the smaller independent drillers. But now, with this new approach to the industry, that consolidation could continue even if oil prices climb. It all depends on interest rates at that time.

The best way to play it remains to own the larger producers. Right now, it would be impossible to know which of the small shale players will be left out in the cold when credit begins to tighten … and which ones will be targeted by the likes of Exxon, Chevron, Shell, BP and Total.

But if you don’t have some of your long-term investments in oil, now’s the time … even if production declines for the first time in eight years.

Happy trading,

The Uncommon Wisdom Daily Team

20 Comments on "Peak Oil Has Officially Peaked"

  1. Plantagenet on Thu, 22nd Oct 2015 3:45 pm 

    Amazing how all these various stories proclaiming peak oil is dead are written by people who don’t even know what peak oil is.


  2. GregT on Thu, 22nd Oct 2015 4:07 pm 

    “The Uncommon Wisdom Daily Team”

    Whatever uncommon wisdom they may or may not have, they more than make up for with lack of common sense.

  3. James Tipper on Thu, 22nd Oct 2015 4:34 pm 

    “When oil prices recover — and nearly everyone agrees they will — shale will be back in business.”

    Guess again.

    “So imagine a scenario where the Fed raises rates”

    Guess again.

    “Those large companies have the cash and motivation to begin scooping up the smaller independent drillers.”

    Guess again.

    “But if you don’t have some of your long-term investments in oil, now’s the time”

    Guess again (unless you’re shorting oil in the long term).

  4. ghung on Thu, 22nd Oct 2015 4:36 pm 

    Plant: “….don’t even know what peak oil is.”

    I’ll bet they know. They’re just building strawmen to lure in investors, like any other sack-of-shit, lying snake oil salesmen. Nothing uncommon about that. Anyway, I left a comment; betting they don’t even have the balls to publish it.

  5. James Tipper on Thu, 22nd Oct 2015 4:37 pm 


    Lol, apparently repeating what mainstream media says about oil is some type of “wisdom”. That the old “price will go up, nothing to fear citizen” is apparently on par with Socrates.

  6. antaris on Thu, 22nd Oct 2015 5:43 pm 

    When mining promoters want to make more money they become oil promoters.

  7. dooma on Thu, 22nd Oct 2015 6:57 pm 

    Very nice image of the oil derrick with the American flag behind it.

    Go team America-fuck yeah!

  8. Davy on Thu, 22nd Oct 2015 7:06 pm 

    Dooma, when the articles are a steady diet of what you just mentioned people get a habituated view of a country. This site should be renamed Peak Oil and anti-American topics. Fuck yeah!

  9. BC on Thu, 22nd Oct 2015 7:38 pm 

    Peak Oil per capita occurred in the US in 1970 and for the world in 2005. There is no refuting the fact.

    Therefore, Peak Oil per capita is a decade behind us in the rear view mirror, and the global structural effects have been occurring since.

    IOW, Peak Oil is history, and you can quote me on that. 😀

  10. Poordogabone on Thu, 22nd Oct 2015 10:44 pm 

    “shale will be back in business. But instead of flooding the market with excess oil, as many believe it has, it will be used as a buffer to both take advantage of higher prices and to keep up with demand. Essentially, shale will smooth the price volatility going forward.”

    That would involve some planning, the market doesn’t work like that as we can see time after time. Viva Capitalismo

  11. GregT on Fri, 23rd Oct 2015 12:04 am 

    “Go team America-fuck yeah!”

    Totally uncalled for dooma. Makes you look like a fuck-head.

  12. Davy on Fri, 23rd Oct 2015 6:35 am 

    When one understands the systematic and adaptive side of the equation we see that the peak oil date is not that relevant. The global system does not switch like a light. Adaptive development or descent is a process. It appears to me and others more petroleum competent this date is history.

    My thoughts are it is just the approach to peak oil along with other critical systematic instabilities that cause growth stress. We know our system must grow in at a steady rate for financial reasons, population reasons, and consumption expectation reasons. When we acknowledge Shorts ETP model we see the issues on the physics side. We know when we look at all the various other peak oil dynamics above and below ground we are seeing compression of the vital range of healthy economic activity between the oil sector and the general economy.

    Prices, production, and demand is not at a healthy level for long term growth and oil sector reserve maintenance. The pure definition of peak oil seems clear with the traditional high EROI oil that built this system since the turn of the 20th century as the basis. When we use all the gimmicks the cornucopians like to employ the topic is hazier. Natural gas liquids and different quality oils mask the true loss of a “physical and value quality” of our foundational commodity oil. Quantitatively the depletions of the high quality and low cost oil must be considered significant.

    I am just amazed the system was able to adapt as it did post 08. The cornucopians are amazed too and they think this can continue. The Fed’s financial repression and expansion by China that occurred post 08 along with the shale revolution gave the world a few years of a pseudo normal. That was a “one off” action. We called in the reserves in our battle with entropy.

    For 8 years the cornucopians have believed they solved the problems of limits and lack of substitution options by various Ponzi scheme gimmicks with extend and pretend games. We are now at the limits of all this activity and we are seeing broad based deflation and credit instability without tools in the tool box. There are so many issues at work besides peak oil that have brought us to this point but peak oil is a foundational reason growth is not adequate for the global system we have adapted to.

  13. Davy on Fri, 23rd Oct 2015 6:56 am 

    We know the US needs to be center stage in our discussions of global problems. This is a vital message because without change in the US any hope of beneficial responses to a coming shit storm are mute.

    What damages that vital message is jingoism. We can present a message that is a legitimate alternative to the corrupted main stream media dominated by the US. To do this and get people to listen we have to lower the rhetoric and present more objective and balanced facts. To get Americans to listen and not turn off we have to avoid name calling and excessive once sided criticism. No one wants to be called stupid on a regular basis especially when other look stupid also.

    The US is the number one problem with global peace because of our failed foreign policy and supersized military. Economically it is really between the US and China. Other areas are also issues but the real engine of growth was the interconnected nature of the US and China being fed off of by the rest of the global system. The Fed must be in the spot light now. This criticism is vital.

    My point is we here at PO dot com can become just another one of the many and boring anti-American sites or do we present vital information that could change the status quo. This is only my opinion as an American. I don’t claim this to be gospel. I am biased and trying to not be biased. It gets hard to not be biased when I must practice judo bias. Judo bias is throwing out criticism of the rest of the world as balance to extremism. What happens is a mud sling and the vital message is lost. Effective messages must be objective and balanced if you want to get an opponent to listen. Those who are down on America don’t need to be convinced. The Americans need to be convinced and to do that you need an effective message.

  14. BobInget on Fri, 23rd Oct 2015 8:33 am 

    Excerpted from another energy board:

    I was sipping a nice glass of cab and reading over the CLB transcript. Some of the statements sobered me up quickly.

    What hit me like a ton of brick is the statement that we need 2.6 MM new barrels and THAT IS JUST NOT GOING TO HAPPEN.

    The spare capacity in OPEC is currently zero. This is a repeat.

    Middle East production is not sustainable. This is another repeat statement.

    Iraq production will decline.

    Because no new viable supply is being added and the decline rate is 3.1%, the international production will continue to fall.

    I have not seen a more bullish commentary from anybody yet.

  15. rockman on Fri, 23rd Oct 2015 8:39 am 

    Sorry I’m late to the gang bang. My 2 cents is somewhat redundant but here goes:

    “Shale producers don’t have to build new equipment. They don’t have to go through the same regulations and restrictions — simply because most of these sites were already used once when they could produce conventional oil.” I have no idea what “new equipment” they are talking about. Not drill rigs because they’ve been available all this time. Production equipment? Yes: need to set up a new set of equipment with each new well. Don’t have the same regulations and permitting process? They are right there: the new rules are a bit more complicated and permitting is a tad more involved. This is especially true with permitting new salt water disposal wells: 6 years ago in Texas it took a couple of months…now closer to a year

    “The opposite is true for independent shale producers. They tend to be far smaller and have lower margins. So if credit becomes tight again…” If credit becomes “tight” again??? I suppose they imagine after the default of tens of $billions in debt the money lenders will just start throwing cash at us as quickly as possible.

    As far as Big Oil licking its lips over the prospects of buying all those shale wells from the small crippled independents…they aren’t. They might go after the biggest producers, say ones still making 80,000 bopd or more. But as much as ExxonMobil would like to add new PROVED PRODUCING RESERVES acquiring existing shale wells doesn’t do that for them. Acquiring rights of UNDRILLED/UNDEVELOPED reserves does very little to help Big Oil books on Wall Street. Except for wells drilled in the last 12 months the remaining reserves PER WELL has been significantly reduced by the initial flush production. Additionally the manpower required to look after these wells begins to increase significantly as they age. While Big Oil might have a lot of capex they also lack enough employees to suddenly look after thousands of old shale wells. This is one of the reasons they go after megaprojects like Deep Water plays: reserve generated PER EMPLOYEE are many times greater then what the smaller companies achieve.

    And lastly developing the shale plays is not a “manufacturing process”. It requires the same efforts and suffers the same economic risks as drilling for conventional targets. Consider what has happened in the Eagle Ford play since last May…long after oil prices dropped and operators began to “high grade” their efforts: 221 new wells drilled. The five best leases had an average initial production rate of 1,527 bopd. By the following August, just 4 months later, they averaged 998 bopd per well…a 34% decline in just 4 months. And how did the worst of those “high graded manufacturing projects” do? Those lower 48 wells had an average initial production rate of 309 bopd. And by August half of those wells (24) were averaging just 181 bopd. And the worse 10 wells: an average of 80 bopd. So after just 4 months the better wells were doing 998 bopd and the worse were doing 80 bopd. If that’s their concept of the easy “manufacturing” of oil production they might consider a different line of business. LOL.

    And if folks wonder why they see numbers from the Rockman that don’t seem as optimistic as they see from other sources they should understand that the Rockman’s data base is publicly available to whoever wants access. IOW the authors of this piece of crap have the same data available to them. It just a question of selecting the data one needs to make their case. Or not present any numerical data and just make unquantified assertions.

  16. shortonoil on Fri, 23rd Oct 2015 12:09 pm 

    When the petroleum industry has reached maximum revenue generation it has reached maximum production output. It is as simple as that! The industry does not produce petroleum, and its products for entertainment.

    The Etp Model states that at the energy half way point, 2012, production must begin to decline. It has only been through the formation of gigantic quantities of debt (that can never be repaid) that a very slow increase in production has continued for a couple more years. That increased production has shown up as historically high inventories. It did because there was insignificant market for the product to begin with. It was only produced because almost free money was made readily available to produce it.

    That free money increased production, and forced prices so low that expansion is now impossible. The recent 55% price decline insures that revenue will never again be equal to its Peak; neither will production!

  17. MrNoItAll on Fri, 23rd Oct 2015 1:21 pm 

    “No one wants to be called stupid on a regular basis…”

    Plant doesn’t seem to mind.

  18. Davy on Fri, 23rd Oct 2015 1:57 pm 

    MR, “cheers”

  19. apneaman on Fri, 23rd Oct 2015 2:11 pm 

    The Ubiquitous nonsense Daily Team

    Always looking for new players.

    No mandatory requirements, but mouth breathers with over prominent brow ridges will be given preferential treatment.

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