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Peak Oil is You


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Page added on April 24, 2022

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‘Drill, Baby, Drill!’

Production

The world’s energy picture is changing almost daily, and everyone seems to have a solution for the high price of natural gas and gasoline.

Drilling for new oil is the solution, our senior U. S. senator said. He didn’t exactly say “Drill, Baby, Drill,” as Sarah Palin famously did during the 2008 Vice Presidential debate, but that’s what he meant.

The so-called solution is decades old, but as Senator Bozeman said, drilling would solve our energy shortage — oil to be exact — and if we would drill, drill, drill, everything would be a-OK.

There’s just one little problem with our senior senator’s observation: Money, honey!

It seems our senator has forgotten a critical part in the “Drill Baby Drill!” solution. It takes one hell of a lot of money.

I can hear you now: “With gasoline at nearly $5 a gallon, you should be rolling in cash.”

Wrong! Wrong! Wrong!

I don’t own any gasoline stations, and the vast numbers of oil and gas companies that drill new wells don’t either. The major integrated companies do, but the thousands of smaller companies don’t, and guess what — most of the drilling is by smaller independent companies, and these are the ones who drill the majority of new producing wells in our country.

But it’s worse than that.

Thousands of these small operators went bankrupt. They aren’t even in the drilling business any more, but it gets even worse than that.

When COVID-19 reduced oil and gas demand and the price of oil cratered, several thousand drilling rigs were stacked, and several hundred thousand oil workers lost their jobs.

I’ve worked as a roustabout and a roughneck during my college days and can vouch for these jobs being well-paying, but dirty and tough. If you think several hundred thousand oil field workers are going to line up to go back to work, you need a reality check. These workers are critical for the tough jobs they do, and there is a huge demand for workers and several thousand drilling rigs are idle because they can’t find crews.

But it’s even worse than that.

When, during the first year of the pandemic, the demand for oil plunged, oil futures went below zero and that caused wholesale bankruptcy in the oil patch by hundreds of small companies. As the pandemic continued, small companies that drilled the majority of the new wells found themselves scrambling for capital just to keep their doors open, conventional sources tightened their lending requirements and many banks suffered huge write-downs on their outstanding oil and gas loans.

Many banks called in all of their oil and gas loans. As these oil loans were called in, the companies who had outstanding loans were forced to sell their oil and gas properties during the worst possible energy market, and, naturally, they received a greatly discounted price. These companies, while many are still in business, have very little, if any, drilling capital or credit lines. That means they have to raise capital, and a lot of bank capital isn’t available because many banks took whooping oil and gas loan write-offs.

Fast forward to 2022, and oil is over $100 per barrel. You would think the drilling deals at the recent trade show in Houston would have investors standing in line to join companies who have partnerships available. Almost all small- to medium-size companies take in partners. These partners buy into a drilling proposal as an investment, pay part of the cost and the company that has the drilling deal is able to pay overhead and other costs.

We took two proposals to the trade show in February. Two years ago we sold out, and this year I expected to do the same. However, the COVID-19 bust was still hanging over the trade show, and although we took in several working interest partners, we came away disappointed.

So what’s the bottom line? Until more money flows into the drilling and exploration market, we are going to see ever higher prices for fossil fuel products, and if we don’t, supply will be less and less, and as Putin’s War winds down and worldwide trade and travel picks up, the prices for natural gas, oil and coal will increase.

Governments may try to ease the pain by releasing oil from the Emergency Storage, but that’s like putting a Band-Aid on an axe wound.

Ultimately, it will boil down to supply and demand. In the past, the pricing of crude oil was rather predictable, and oil would cycle up and or down as the amount of new oil came on the market.

However, this cycle is not typical. We have never had a runaway upward price that seems to be a result of an over-supply due to a pandemic, and then, just as you think it is safe to get in the water again, a crocodile — Omicron — bites you in the butt, and before you can get out of the water, a killer whale roars toward you (Putin), and you don’t know whether to fish or cut bait.

All of the above is complicated by the increasing worldwide use of fossil fuels. Currently, it’s around 95 million barrels of oil a day. In oil and gas terms, that is one giant oil field which has reserves of over 100 million barrels of oil. Worldwide, oil and gas companies would have to find 365 of these giant fields a year just to stay even.

Most experts don’t believe we can do this, and what is even more complicated is that some so-called experts believe we have almost reached peak oil production, which means we can’t increase oil production on a worldwide basis.

To complicate matters a little more, when Putin gets enough war to call it quits, worldwide travel takes off again and economic activity soars, oil demand is expected to reach 100 to 110 million barrels of oil a day.

This old Norphlet boy, who isn’t that good at math, is in way over his head. But I’ve never let the lack of knowledge or understanding keep me from pontificating, so here goes: A looming fossil fuel energy crisis will send prices skyrocketing; only the richest nations will be able to subsidize prices, and $200 oil and $10 gasoline will be commonplace. That will force conservation, and the world will go into a new economic age, which will usher out, over the next 25 years, the use of fossil fuel (oil, gas, and coal) and result in a rush to use renewable energy.

It will be as dramatic as the past industrial revolution, and our world will never be the same.

As the turn to non-fossil fuels becomes commonplace, global warming, which causes climate change, will slow, and Earth’s atmosphere will slowly began to cool.

It may take the next 25 years to accomplish, but for every barrel of oil produced, there is one less barrel in the ground. Oil is a depleting energy resource, and one day it will all be gone.

Therefore, we must turn to non-depleting energy sources, but we won’t turn to non-fossil fuels until we can’t stand the pain at the pump.

The only question is when.

Richard Mason, columnist, El Dorado



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