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The Most Exciting Event in the History of Technical Analysis

There Will Be Oil - Versus - Peak Oil Now

Commodities / Crude Oil Jan 01, 2012 - 11:19 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleClaiming there is an oil limit on the economy and why peak oil is inevitable is usually talked down by saying its an unsure theory at best, and controversial, fear mongering or defeatist at worst. The totally simple numbers which prove it are however not Einstein-type mathematics and are not impossible to understand - - only by the badly intentioned or plain stupid.

We can start with the average oil consumption of OECD countries of about 14.4 barrels/capita/year, and try extending that to China and India. Presently they consume about 3 barrels per head in China and less than 2 barrels per head in India with recent growth rates as high as 6% per year.


This answer is simple: this is not possible. This will not happen. To be sure Chinese and Indian oil demand will increase, to be sure OECD oil demand will decrease. How this happens is the problem.

Daniel Yergin writing in 'Wall Street Journal' in Sept 2011 said: "Since the beginning of the 21st century, a fear has come to pervade prospects for oil (sic), fueling anxieties about the stability of global energy supplies. It has been stoked by rising prices and growing demand, especially as the people of China and other emerging economies have taken to the road".  His article was titled "There Will Be Oil". There are no worries !

Yergin like other technological and market optimists argues tight supplies lead to high fuel prices, and high fuel prices will make previously uneconomic and inaccessible oil resources, and any other limited-reserve or non-renewable resources extractable and producible. The trouble is that high prices are not just a symptom of the supply problem; high prices are the problem.

The Conventional Wisdom is the economy keeps bulldozing ahead, Titanic-style, maybe with some frictional inflation and a temporary blip upward in unemployment and company insolvencies, sovereign debts might rise a little, or a lot, but basically there is no oil shortage. No problem.
However, certainly since oil prices "bounced back" near the 100-dollar range for WTI, and as much as $125 a barrel for Brent, in October 2011, there has been a predictable flurry of outpourings from the No Worry school, where the logic is always contortionist.

CONTORTIONIST LOGIC
What we get from the No Worry school is a stock of one-liners. The premium one-liner is that thanks to deep offshore oil and shale oil, and falling oil consumption per unit of GDP, and other factors (even including green energy) we now have a realistic possibility that North America will be able to "declare oil independence", possibly within 10 years, but the exact date is eluded. The next is that Chinese and Indian oil demand will grow, to be sure, but supplies will be ample even if high priced - and because oil is high priced. Add-on rationales stretch into the frankly schizophrenic, including "inevitable innovation" in energy supply. Energy demand will flatten all on its own and spontaneously - not because world oil supplies will stop growing on a net basis (annual capacity loss versus capacity gains), forever, from as early as 2015. This is the International Energy Agency's line. Its line on "forced innovation in energy" and its continuing cutbacks in forecasts of world energy demand growth rates have become strident, which conspiracy theorists can explain away any way they like but IEA data on declining reserves of conventional oil is hard to ignore.

Contortionist oil logic actually welcomes the greatest recession since the 1930s by callling its stark effects - falling oil demand - the result of energy efficiency gains. We now have a new model for levering up innovation: Economic crisis and recession now equals innovation in energy ! If you didnt use your car to go to work because you dont have a job anymore - you are "innovating" in energy.

Most important of all, the stark, off-the-cliff fall in world oil production from lower cost, conventional, first generation, mature onshore fields that is well documented by the IEA, needs to be talked down and out by the No Worry school.  At best, the lame duck argument for why conventional oil reserves are falling, and will go on falling is that the "free world forgot about oil" in the 1980s and 1990s, because it was cheap, and therefore did not invest in oil. And today we are investing more. So things are OK. This changes nothing about future supplies: analyzing and forecasting future oil supply is impossible without integrating the sure and certain decline of mature fields.

Their rate of decline is a burning issue, to be sure, but the ballpark estimate is around 3.3 - 4.5 million barrels a day of lost capacity per year. Keeping this loss rate down to 3.3 Mbd per year and replacing as best as can with NGLs, deep offshore oil, tarsand and shale oil is the name of the game, but this has a carefully ignored and inevitable mega impact: world import dependence on OPEC can only grow.

Put the other way round, the last date at which non-OPEC production can increase, to an ultimate peak set at around 58 - 59 Mbd, is probably at latest 2015. After that, the growing dependence on OPEC, which has risen for 15 years (not 15 months or 15 weeks), will further accelerate. The next question - Can OPEC produce more ? - becomes the real killer question, and here again the answer is very simple: not for long and invasion/regime change war games will do nothing to change the read out. Also, to be sure, OPEC states could or might want to conserve their natural resources and "stretch the oil age".

PEAKS AND SILLS
All the parameters can be stretched if world oil demand falls from its ultimate peak set by the depletion of conventional oil resources at around 90 - 92 Mbd. Current demand is about 89.5 Mbd.

Peak demand is therefore what matters, because peak supply is getting better known: possibly 92 Mbd and probably before 2015.  Conversely and in the totally hypothetical scenario of China and India ever consuming as much oil per head as the USA, South Korea, Japan, Germany and other OECD countries, they would need a combined 90 Mbd all to themselves to satisfy their demand. This is so luridly impossible it is amazing "nobody talks about it".

Falling global oil demand is totally possible - recession proves it. Also, most "advanced industrial" or "postindustrial" countries with car fleets so massive their numbers run at 1 car for every 2 persons, including infants and the aged (compared with 1 car for 15 persons in China), could compress their oil demand through making a very rapid switch to natural gas fuelled road transport. Shale and coalseam gas reserves are certainly not falling off a cliff, but we have the amazing spetacle of the gas fuel option treated as unclean, unsustainable, high carbon, not consumer friendly - and so on.

The gas road fuel alternative "isn't wanted onboard for the moment". Possibly because Oil Wars are so invigorating ? Perhaps because oil at $150 a barrel is such an interesting economic challenge ?

FANTASIES AND FOIBLES
We get shunted into fantasy land because the Oil Future is so bleak. The green energy option, or so-called option is wheeled on stage, despite it being impossible to substitute current per capita fossil energy consumption in the so-called "postindustrial" countries consuming every imaginable type of industrial good and service. Green energy is in fact a bolt-on to the fossil energy pyramid, promoted by the media and communicated using every trick in a game where the public doesn’t know the rules. The "switch" to green energy would first need a massive shrink of energy use in the economy, in a fact a totally different economy, society and culture. Wecome to the future but lets not talk about it !

Facing these 'difficult and challenging outlooks' we find a fragile alternative slogan pack including the new one-liner coming out of the US that "America is entering a new age of plenty". This is as fake as imagining that bankrupt solar cell manufacturers such as Solyndra LLC or Solon AG would or could have "reinvented" energy almost overnight. Insolvencies in solar and wind energy are as generalizable to the very fragile green energy industry as BP’s deep offshore Macondo oil spill is for offshore oil production, and Syncrude Canada Ltd's destruction of vast tracts of Alberta's environment to hike out the shale oil at fantastic energy cost, as well as environmental cost.

It can be called "abnormal and surprising" that oil prices have bounced back so fast, and so high since the 2008-2009 downturn, given the real state of the global economy today. This is simply another alarm signal from the real world, that is carefully ignored or talked down. With Arab Spring tensions stretching right across the MENA (Middle East and North Africa), the oil-swilling crowd is getting anxious. And the crowd should be anxious, but all worries are not created equal.

One claimed "reasonable worry" is that tight supplies are only or mostly due to Wrong Regimes being in place, in oil exporter countries, and that rising oil prices threaten to send our fragile economy back into recession. Set against this, therefore, the child-minded public must be fed with the myth of everlasting oil abundance only temporarily denied to them by Wrong Regimes which can be eliminated, Gaddafi-style, plus home-produced oil, plus energy saving - and why not also green energy ? The vast fragility of these fantasy themes is yet another proof our elites and media Mind Controllers have got themselves into Oil Panic mode and we can easily fear a lot more of this medecine.

The basic problem is that Oil Independence for the USA, Europe, Japan and South Korea - or China and India - is a pure and simple myth unless the global economy disappears or these countries totally restructure their energy economies. Musings on energy oppression and dependence on evil foreign dictators, musings of energy independence, are worse than simply misguided and misleading and in my opinion the 2008 peak for oil prices, over $145 a barrel, sets a new but never admitted Oil Paradigm.

Oil has tipped back into the magic status it had for about 11 years through 1974-1985, when gold rush mentality, or fever took over. Used by the No Worry school, the argument is we have an Oil Rush, just like the 1848 California Gold Rush - which will solve the supply problem, even if it also produces "temporary price distortions".

The 49-ers operated at desperately low productivity, like Brazilian or Congolese informal miners of today, and also like the inevitably low energy productivity (large energy quantities needed to produce 1 barrel) of shale oil and other "unconventional" oil production today. Gold production rose from about 1 400 ounces in 1848 to more than 3.9 million ounces by 1852. After that it decreased: Production declined by 50% in the 10 years 1852-1862 and fell another 30% by 1872. By an interesting detail of technological history, in the early 1850s there was a short period of hope the decline could be slowed or reversed using ‘hydraulic mining’ – a process where massive amounts of water under intense pressure disintegrate entire hillsides. The comparison with hoped-for but unlikely shale oil production, following shale gas production using the same hydrofracking technology, is very clear.

Hydraulic mining does work with shale gas but is very unlikely to work with shale oil, and did little to slow the decline of gold production in 19thC California. The basic reason is simple physics: the mass of what is being extracted and produced. One barrel of standard gravity oil (around 38-40 degrees API) weighs about 135 kilograms, but a barrel equivalent of gas weighs a few kilograms. Only an idiot will tell you shale oil "ought to be as easy to produce as shale gas".

SHORT RUN LONG RUN
Put in simple numbers, world oil demand at 90 Mbd or 32.8 billion barrels a year makes it necessary to find, and then produce so-called mega fields or provinces very fast. The USA's Alaska North Slope and the Norwegian-UK North Sea province which both started production at serious rates in the 1975-80 period, with annual growth of output often topping 15%, doubling in 5 years, are now in irremediable and permanent decline. In the 1980s, these 2 provinces did at least as much as Saudi Arabia and Russia, and the economic recession through 1979-83, to collapse oil prices in 1985-86 and hold them low right through to year 2000.

Alaska's biggest single field, discovered by BP and ARCO in 1968, was the Prudhoe Bay field which is estimated as having about 25 billion barrels of crude before extraction commenced in 1977. Excluding the very minor North Sea fields offshore Germany and Denmark, the Norwegian and UK province is estimated as having had about 55 billion barrels when major discoveries were extended in 1968 from gas-related near offshore exploration and proving, and extraction started growing.

Related to these numbers (Prudhoe Bay + North Sea = 2.4 years world oil demand), the rush for shale oil is understandable ! We therefore have the Bakken shale oil formation wheeled on stage by the optimists, estimated by the US Geological Survey to contain a supposedly "impressive" 4 billion barrels of technically recoverable oil in place - but this is peanuts compared with Prudhoe Bay or the North Sea. Technologically also, the Bakken's geology of 'tight' sandstone, similar to gas-trapping formations, does not mean gas extracting hydrofracking will do the same trick, and "unlock" the oil in place. Basically, flow rates from shale oil wells are low compared to the flow rates for gas extraction and very low compared with wells tapping conventional oil formations. Optimists can of course point to a total 2011 shale oil output nearing 0.6 Mbd from the 700-plus shale oil wells operating across the Bakken Field - but this needs to be compared with US oil demand which in 2011 averaged 19.1 Mbd.

Put another way and even more simply, Bakken production has at best covered the decline in Alaskan oil production, and since 2006 wells in the Montana section of the Bakken formation are in decline themselves.

Those who want to confuse the issue and clutch straws will go on to claim that "global Bakkens" are everywhere and will be developed in the nick of time, carefully confusing oil resources, on one hand, with producible oil reserves on the other. Worldwide, shale gas - because it is cheap and easy to produce - has to come first and problems as basic as water supply are slowing this first stage. Increasing gas supplies, because political deciders refuse to enable its greater use, will not slow the Peak Oil countdown, driven by the ultra simple reality of declining conventional oil reserves (and resources), which are not compensated by growing unconventional oil reserves (and resources), world oil demand will have to decline very soon.

In this real world, oil prices can only react and will react, exploding any time the right mix of daily news enables the traders to do this. This will be despite global economic recession and because oil-motivated political action by the world's biggest oil consumer countries will become more naked, open and aggressive.

There is No Alternative.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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