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Page added on May 26, 2016
Peak Oil 2.0: Is It Time to Panic?
Longtime energy investors remember the days before hydraulic fracking and horizontal drilling. Back then, everyone was concerned about peak oil.
In case you need a refresher, peak oil is the idea that we’ve hit the maximum rate of oil extraction. From there, production can only dwindle.
That idea might sound silly today. After all, the U.S. is currently awash in shale oil.
But there’s a small group of people who aren’t laughing. They believe we may never again produce oil at the rate we are today.
In other words… Peak Oil 2.0.
Skeptical? Read on.
A Record-Setting Year… But Not the Good Kind
On Friday, May 13, IHS Energy released an alarming new study. It found that the volumes of oil and gas discovered outside of the U.S. last year were the lowest since 1952.
Oil alone set a record low, with only 2.8 billion barrels of oil equivalent found during 2015.
Natural gas findings were 9.2 billion BOE.
One major reason for the low number of discoveries is the lack of E&P companies out looking for oil.
Deepwater (1,000-5,000 feet) exploration was down 20%. Ultra-deepwater (greater than 5,000 feet deep) dropped by a whopping 40%. Those numbers aren’t likely to improve this year, either. Exploration and drilling budgets are even lower today than they were in 2015.
And a quick scan of my offshore sources confirms many customers are canceling their offshore rig orders. Some are even paying hefty fees in order to do so.
It can take three to five years to build one of these massive rigs. So that sector won’t be recovering anytime soon.
That’s a big problem.
A Big Hole in Our Oil Supply
The vast majority of large, conventional undiscovered oil and gas fields are offshore. Unfortunately, these fields are uneconomical to develop with oil prices below $80 per barrel.
That’s why a few years ago, when prices first dipped under $60, many oil companies refocused their efforts. They bet big on U.S. shale.
Now, many are regretting that decision. Most shale basins – other than the Permian – are losers at current WTI prices. (Though there are some winners, as I showed you here.)
If we look out five to 10 years, we see a big gap forming between supply and demand… again.
Lack of conventional exploration, especially offshore, will leave us with a big hole in our oil supply. And if we go by the IHS numbers, all the oil in shale formations won’t be enough to fill the gap. The study puts global shale oil production at just 10% to 15% of our total supply by 2040.
So, the question is… are we actually heading toward Peak Oil 2.0?
Two Factors That Will Bolster Production
The answer is complicated. As a society, yes, we’ll have to get there eventually. (Emphasis on eventually.)
But in the meantime, a lot can – and will – happen to bolster production.
First, as demand for oil starts to outstrip supply, prices will rise. They will eventually hit the point where well-positioned E&Ps can start drilling again.
Another force knocking down our current glut? Bankruptcies in the industry.
Smaller producers are going out of business left and right. As a result, we are going to have to dig into reserves to fill the gap. This will, in turn, boost prices… making it possible for Big Oil to finance new offshore projects.
It may be years before we see oil prices at their pre-recession levels. But even a slight boost will make a short-term production increase feasible.
That means Peak Oil 2.0 should still be a long way off.
Good investing,
Dave
31 Comments on "Peak Oil 2.0: Is It Time to Panic?"
Truth Has A Liberal Bias on Thu, 26th May 2016 7:00 pm
The world produces less oil now than it did in July 2015. Using the data we have available from JODI and EIA July 2015 was peak oil. Time will tell whether or not that peak will stand or if a new peak wil be made. My guess is that was peak. While it is true that ‘Merika can increase production once prices rise again I don’t think it will make up for declines elsewhere. I also think that the oil production ‘Merika brings on will have a lower EROI than the declining oil that is produced elsewhere. The future oil production that gets brought online will also come from fields that peak and decline sooner than the fields that produce elsewhere. ‘Merika will replace declining world onshore and conventional with domestic offshore and unconventional.
Survivalist on Thu, 26th May 2016 7:06 pm
Here’s a copy and paste of a comment Mr R. Patterson made over at his blog. I do this because it’s a good comment as it links to a great article:
Raymond James says Saudi Arabia is lying about their production capacity.
Mystery: How much more oil can the Saudis really pump?
Mohammad Al Sabban, the former Saudi representative to OPEC until 2014, insists Saudi Arabia really has the ability to ramp up output to 12.5 million barrels a day.
Yet Al Sabban told Raymond James that only half of those barrels would be available immediately within days or weeks. The rest could take up to six months.
Raymond James thinks investors should take those claims with a grain of salt.
“We don’t buy the Saudi excess capacity argument,” the firm wrote.
Raymond James points to three reasons why they think Saudi is lying. I like #3 the best.
3.) Saudi rig counts are surging: There is a camp in the oil industry that believes Saudi Arabia’s oilfields have gotten so old that they aren’t as productive as they once were. For instance, the Ghawar field — the world’s largest with an estimated 75 billion barrels of oil — is over 60 years old.
Skeptics point to the fact that rig counts in Saudi Arabia have tripled over the past decade — even though output hasn’t gone up nearly as much. At the same time, Saudi stockpiles of oil have declined by around 30 million barrels since October 2015.
“If they only need to turn valves on to flood the market, why are Saudi oil inventories falling?” Raymond James asks.
Survivalist on Thu, 26th May 2016 7:08 pm
Ops here’s the link
http://money.cnn.com/2016/05/25/investing/how-much-oil-can-saudi-arabia-pump/
Practicalmaina on Thu, 26th May 2016 7:08 pm
Truth, there you go, a productive comment, goood job buddy, for hating on this website you commented first on this article quite nicely.
Survivalist on Thu, 26th May 2016 7:09 pm
One analyst told CNBC that he doubted the very foundation of the U.S. shale oil industry which he said had been founded and expanded on cheap money and had effectively been a “Ponzi scheme” – an investment operation that generates returns for older investors by acquiring new investors.
“I think in ten years’ time someone is going to write a great book and make a great movie about the shale industry in the U.S. because I think it is, quite frankly, one of the biggest Ponzi schemes known to mankind,” Gavin Wendt, founding director & senior resource analyst at MineLife, told CNBC on Thursday.
http://www.cnbc.com/2016/05/26/shale-oil-industry-a-ponzi-scheme-or-can-it-boom-again.html
JuanP on Thu, 26th May 2016 8:14 pm
“That idea might sound silly today. After all, the U.S. is currently awash in shale oil.”
Gee, we are so awash in shale oil in the USA that we only need to import a few million barrels of oil per day for things to keep getting worse for more than 90% of Americans every day. Wonderful! Let’s PARTY! Viva el shale!
JuanP on Thu, 26th May 2016 8:20 pm
Hey Rock, What were the oil discoveries in the USA in 2015? This quote included in the article excludes the USA.
“On Friday, May 13, IHS Energy released an alarming new study. It found that the volumes of oil and gas discovered outside of the U.S. last year were the lowest since 1952.”
JuanP on Thu, 26th May 2016 8:22 pm
I thought that 2.8 billion included the USA according to something I read a few days ago but can’t recall specifically.
makati1 on Thu, 26th May 2016 8:58 pm
More hype and hope for the oily investors.
Go Speed Racer on Thu, 26th May 2016 9:54 pm
I am sitting here at the burger drive in, and ate a burger and fries. Obviously all the peak oil is bullcrap because my car is not using any fuel at all while I eat my burger. Only that the battery gets run down a bit. See you have to turn on headlights so the gal on roller skates will stop by an bring more ketchup. This is not a fuel consumptive activity !! so all the anti America peak oilers should go back to Russia and get a red star T-shirt, and a bear hat. Then stand in line for toilet paper. The rest of us can finish our burgers in peace, and vote for Donald Trump.
GregT on Thu, 26th May 2016 10:00 pm
Make America Great Again! Hope and change! Burgers, toilet paper, Donald Trump, and the capitalist wet dream. What could possibly go wrong?
Harm on Fri, 27th May 2016 12:47 am
Good grief, so much hand-wringngover so little. Yes, there will be a peak someday. No, it did not arrive within the predicted timeframe. It might have already happened in 2015, or (more likely) could still be years off in the future. Regardless, the sky hasn’t fallen and life goes on.
I have to admit, I’ve gradually come around to the Charles Hugh Smith POV on growth and BAU. We cannot do anything about it, nor can we expect world “leaders” to bite the hands that feed them. Better to spend our limited time learning a sustainable trade, growing an urban garden, fixing things vs. adding to landfill, networking with like-minded people, cultivating community and enjoying family. In a few short decades we’ll all be worm food anyway.
tita on Fri, 27th May 2016 5:11 am
The actual situation has a lot of similitude with 1998. At this time, the oil traded at 15$ due to the asian crisis, and the investments for E&P firms came to the lowest. This led to a decade of gradual price increase (and the peak oil theory doom becoming mainstream), ending with the oil shock of 2008.
The same dynamic will replay with different parameters. Instead of going from 25$ to 10-15$ before increasing, we went from 100$ to 30$. The harm is done for producers, but we have no idea how quick they will respond with prices below 90$, and how the global economy will respond to prices over 60$.
Davy on Fri, 27th May 2016 5:36 am
The most immediate challenge and danger is economic. It is unclear if we will see an immediate generalized depression from economic collapse but it is clearly a potential right here right now. An economic collapse could easily happen tomorrow. Peak oil issues and climate change issues are a few years hence. Many doomers want to dwell on peak oil and climate change but it is the economy that will likely get us first. Peak oil dynamics are part of this economic decay but it is the economy that drives peak oil dynamics. Climate change is the cliff to the abyss. We are close to an abrupt climate change period that will likely smash any recovery a disrupted economy could manage.
It is my opinion the trend and momentum is down and a return to modern growth will never again happen for mankind. It is possible life could stabilize at a much lower economic level then begin to rebuild a new civilization but because of abrupt climate change waiting in the wings it is likely we are in the end game of the human species as a modern people.
Go Speed Racer on Fri, 27th May 2016 5:39 am
Here is the Trump roadmap to the future:
https://dreamkitchenbath.files.wordpress.com/2010/08/galaxy-drive-in-2.jpg
We will deport anybody who doesn’t look like they belong in the picture. All the blueprints for 1950’s will be dusted off, and put back into production.
Also we will import people from the 1950’s, who work for a living and aren’t substance abusers.
Lastly, we will return to vacuum tube amplifiers, with vinyl records.
Vote Trump and make America great again.
See how that works in production: So like you know that crappy neighbor with a big belly, in an undershirt and never mows his lawn and he’s driving down your property value? Well, Trump will deport him — and replace him with a weight-lifter from East Germany who is just finishing up his English lessons. And the replacement neighbor has several lawnmowers and uses them regularly. So much easier on the eyes and ears. Vote Trump. Life’s a bitch, dont elect one.
Cloud9 on Fri, 27th May 2016 7:18 am
The real truth is that voting is a bit like buying a pig in a poke. You have no idea what you are getting. I am personally a really tired of political dynasties. Whoever gets in will replace less than one tenth of one percent of the government. The bureaucracy will continue to rule us as long as the system survives. Bernie would probably be more palatable to the bureaucracy because he would grow it even faster with his socialist bent. After all, under a socialist regime we all either work for government or are dependent on the care it gives.
Things evolve from the simple to the complex and then they devolve. We are in the age of devolution. Trump may be better or worse than the current crop running the show. His focus on nationalism and regionalism may be more realistic in a collapsing world economy.
makati1 on Fri, 27th May 2016 8:15 am
Cloud9, in 2010 there were over 22 million government employees in the US, I’m sure that number has not gotten smaller. That is 1/4 of the total employed adults today.
Not to mention that over 50% of Americans get some kind of income from the government either directly or indirectly through subsidies, grants, welfare, payroll, SS, the Meds, unemployment insurance, etc.
So, how is the Us NOT already socialist? Just askin’.
makati1 on Fri, 27th May 2016 8:15 am
BTW: If I were to bother to vote, I would likely vote for Trump just to see what happens. LOL
rockman on Fri, 27th May 2016 8:15 am
Juan – “Hey Rock, What were the oil discoveries in the USA in 2015? This quote included in the article excludes the USA.” That’s a tricky question…what flavor of bullsh*t are you in the mood for this morning? LOL.
You have to define what you mean by “discovered”. The Eagle Ford and the Bakken have added a lot of proved reserves and production in the last few years. But they are new “discoveries”: both reservoirs were discovered to contain producible oil more than half a century ago (as mentioned many times I drilled and frac’d my first EFS well 30 years ago). And almost 20 years ago we had the tech to significantly increase their productivity. What we didn’t have was the high oil price to develop either play as has happened the last 8 or so years. And, of course, the same is true for the Canadian oil sands.
BTW a number of the fields now being DEVELOPED in the ME were DISCOVERED many years ago.
So do you count any of those new EFS/B wells drilled in the last 10 years as discoveries or as development wells in trends that were discovered decades ago? The hz wells and frac’ng made them more productive but the industry still knew the oil was there before many on this site were born. LOL.
So I think you can answer your question on your own: ignoring the EFS, B and oil sands: what other major oil discoveries have you read about in North America IN THE LAST 20+ YEARS? Obviously only one trend has seen such development: the Deep Water GOM. But even with those fields now you have to define what a “significant” discovery is. Here’s some numbers from the govt: http://www.boem.gov/BOEM-2015-036/ –
Number of shallow fields (<500’ water depth) discovered decades ago: 1,080. Production: 41 billion boe. Remaining proved reserves: 1.2 billion boe.
Water Depth 500’ to 7,500’+ fields discovered: 220. Production: 10 billion boe. Total reserves remaining: 4 BILLION boe.
So yep: lots of new oil discovered in the DW GOM over the LAST 30 YEARS. Yes: first DW field began producing over 35 years ago. So compare the new “big discoveries” made in the offshore in the last 10 years and to the reserves they are trying to replace. Not too impressive, is it? And the DW GOM is THE only highlight of “new” N American discoveries to consider.
PracticalMaina on Fri, 27th May 2016 8:17 am
Bernie would cut out the part of the governments bureaucracy thats sole responsibility is to bend over for the no lube rape that the big banks, wall street, insurance company’s, ff cos, pharmaceuticals, essentially any type of big business, this is actually a large part of the federal government.
q1 on Fri, 27th May 2016 8:19 am
“This will, in turn, boost prices… making it possible for Big Oil to finance new offshore projects.” If we can afford boosted oil prices and the economy will not collapse.
PracticalMaina on Fri, 27th May 2016 8:23 am
The head of every regulatory agency in the US should be fired, they were all placed there in order to coddle the businesses they are supposed to be regulating. No matter who gets in the deficit is going up, Bush’s wars are going to continue to cost us for decades to come. Our infrastructure is in rough shape, the MIC is gonna want what they think is theirs. Domestic fossil fuel production will fall and the return of expensive oil will crush a large amount of our current economic activity. Trump getting elected and disseminating the EPA wont change that.
JuanP on Fri, 27th May 2016 8:25 am
Rock, Thanks for the morning laugh! LOL! That’s what I thought, but I wanted you to confirm my suspicions. Have a nice day, buddy! 😉
Harquebus on Fri, 27th May 2016 9:09 am
High oil prices stifle the economy. 2007/8 is going to look like a picnic.
rockman on Fri, 27th May 2016 9:21 am
Juan – As folks here have been learning: the reality sucks. LOL. That’s why I like posting FACTS and let other editorialize. Opinions and expectations might vary widely…facts seldom do.
Cloud9 on Fri, 27th May 2016 11:09 am
Mak yes we are a socialist state and the fascine is our symbol.
sidzepp on Fri, 27th May 2016 6:35 pm
The fact that Bernie and Donnie are so popular is that the world is going through the early stages of a major catastrophe because of the doubling of the world’s population over the last fifty years. People have become complacent and yearn for simple solutions to complex problems. Whether it be fossil fuels, environmental degradation, deforestation, over fishing the oceans and other major waterways, threats on our food production network, etc., we are faced with an endless list of problems that threaten our existence. We look for simple answers and yet none of us seem willing to change our ways. As long as we blame others and seek archaic solutions to our problems we are doomed to face a major confrontation with our problems and probably live as we know it will cease to exist.
Have a nice Memorial Day weekend
makati1 on Fri, 27th May 2016 7:24 pm
Sid, that “doubling of the population” bullshit is NOT why we are in trouble. Greed by the West, and America in particular, is/was the problem. Wealth transfer to the top by the use of debt is/was the problem. The world could still support our 7 billion in reasonable comfort IF the resources were evenly distributed, and no one wanted a yacht and three mansions. But when 8% owns 80%…
Davy on Fri, 27th May 2016 8:07 pm
Bullshit, population is the greatest problem and anyone who disagrees is hiding something. Maybe that something is denial. You don’t evenly distribute resources either. This world is not made up that way. We know wealth inequalities are an issues and have always been but that is not where the tipping point is. We are several billion through a sustainability envelope.
JN2 on Sat, 28th May 2016 1:34 pm
Mak, can’t find your numbers but I’m seeing 5% own 72%. Unbelievable…
Also 20% owns 93%. What happened to the 80/20 (Pareto?) rule?
http://bit.ly/1P6TBjh
Davy on Sat, 28th May 2016 3:30 pm
Wealth representations are decieving and misused. How much does a billionaire own? Not much when you cut out the digital and abstract. Kill all the billionaires and redistribute their wealth and make the world happy? Hardly. It don’t work that way. We are talking global economics and finance in a modern age of abstraction. We still have he issues of economic distribution that is not directly related to abstract wealth.
Now we do have a serious issue with consumption inequalities. This is where you need to do your analyzing. Using aggregate ownership numbers makes for a great conversation but fails a reality test. Look at lifestyles and consumtion levels that is where you get to the heart of the matter. You will also need to account for people’s that chose large families. People can’t have big families and expect all these additional people have a right to wealth. It is population and consumption that is killing the earth.