The Peak Oil Crisis: Looking at 2013

January 23, 2013 8:37 PM7 comments

We are only a few weeks into the New Year and already the shape of the next 11 months is starting to form. To start, the U.S. Department of Energy sees two good years in front of us with increases in domestic tight oil production and falling demand in Europe offsetting what now looks like a million b/d increase in global demand in each of the next two years. Demand for oil in the U.S., which has been falling pretty steadily in recent years, is forecast to increase a bit in 2013.

The Paris-based International Energy Agency, however, is not so sure about the next two years. The Agency recently started talking about coming “tightness” in the oil markets as economic growth in China gives indications of starting to revive, increasing its demand for oil. If you want a really pessimistic forecast, you might be impressed by the Goldman Sachs chief commodity strategist who told a conference in Frankfurt that he would not be surprised to see oil prices reach $150 a barrel this summer from the current $112.

Needless to say oil at $150 a barrel would cause serious economic dislocations. Back in 2008 when oil prices got into the $140 range all sorts of bad things happened, many of which are still with us.

Now everybody knows that a major reduction of oil exports could easily drive prices up by tens of dollars a barrel in short order. Last spring, when the rhetoric between the Iranians and Israelis reached a zenith, prices were driven up by threats to close the Straits of Hormuz. Although the current rhetoric is much lower, the Iranian nuclear confrontation is still with us.

There are other, more likely, ways that oil exports could be curtailed. It is hard to believe that Iraq is not sinking into civil war. Bombs are going off nearly every day in Iraq and tensions between the Sunnis, Kurds, and the Shiite-controlled government in Baghdad are increasing with every passing week. Oil production is already slipping, several big western oil companies are pulling out of the oil fields under Baghdad’s control, the Kurds will no longer ship oil through Baghdad’s pipeline, and tanker shipments to Jordan have been halted.

It is difficult to foresee Baghdad increasing its oil production by any significant amount in the next two years, but easy to see domestic chaos increasing to the point where production starts to slip or even stops.

Another possibility for oil supply disruption could be the transition from a Chavez-dominated Venezuela to whatever follows. The US is importing roughly a million barrels of oil a day from Venezuela. While the post-Chavez transition, whenever it comes, may take place without problems, it could be a difficult one involving coups and counter coups which would curtail oil exports for years.

In recent days the situation in Algeria and by implication Libya has come to the fore. So far the Algerian government has used oil revenues to keep discontent under control, but Libya is far from stable and accordingly the country’s oil production is 500,000 b/d lower than a few years ago. Given the instability there it could go even lower.

There has been little change in the Sudanese and Syrian situation. The chances that either will resume normal exports in the coming year in the coming year range from low to non-existent.

Finally we have the trend to more extreme weather to consider. So far most of the weather-related effects on oil production and distribution have been storms in the Gulf of Mexico; however last year we saw a major disruption to the oil distribution system in the New York region. As floods and droughts become more prevalent, these too could impact oil production and distribution around the world, especially as more oil and gas production moves offshore.

If there are major export disruptions in the year ahead, prices obviously will go up – perhaps way up. If, however, the world manages to muddle through the next 11 months with the oil still flowing at roughly current rates, then the question of where oil prices go becomes more complicated. Conventional wisdom says European oil demand will go down this year and possibly next, U.S. oil demand will remain about the same, and demand from China and other developing and oil-exporting countries will go up by about a million barrels a day. We should all keep in mind that the Saudis are currently building three large oil refineries so that in 3 to 4 years their export of crude will be about 1.2 million b/d lower than it would have been otherwise.

As we have been told incessantly in recent months, US oil production has been rising rapidly due to production from North Dakota and Texas tight (fracked) oil fields. Last year it grew by about 780,000 b/d and many are expecting such increases to continue for a while – hence the lack of concern about the global oil supply in the near future. Some geologists, however, noting the high cost of fracked oil wells and their short life, believe that this great upsurge in production will have to come to an end so that rates of production increases start dropping and eventually decline.

While there are already a few signs, such as lower initial rates of production from fracked oil wells, most observers believe the balloon still has a year or two to go before it pops. The cost of producing oil from fracked wells is very high and in some cases close to current selling prices. If economic conditions should lead to significantly lower oil prices in the next year or two, it is likely that new supplies of very expensive oil would dry up quickly and the whole fracked oil boom would be over.

As usual, there are too many variables, ranging from prices to insurrections to extreme weather, to make a reasonable forecast of what is going to happen.

  • http://www.facebook.com/chrismcdonald0 Chris McDonald

    Tom- I appreciate your pieces for their non-sensational yet seemingly accurate portrayal of the world energy scene. I always associate your writing with how things “really are” instead of how people want me to “think they are”…..

  • zaphod42

    If prices of oil drop, frac’d oil production will diminish as well. That would limit supply, and of course prices would again rise, perhaps to the $150/bbl quoted in the article or higher. That in turn would limit use of money for other purposes, in particular debt service by consumers. That would again place the economy in dire straits.

    A true paradox, one would think. The best thing that could happen would be nothing at all. Everything remains static, no growth, prices level. Give the way that high speed trading works, that is not likely to happen.

    I fear that the triage has already begun as to who uses oil, and for what. And, that triage as to money supply has not yet begun. Nor do I venture to guess who and how that would be done, other than a gaze into our past to see that the banks will ask the people to bail them out again. I can only hope that the answer may be, “No!” this time.

    • auntiegrav

      Any decent amount of thinking should put the fear of oil dependency into everyone with one word:

      Food.

      We have spent the last 100 years de-skilling and replacing people who fed themselves on the land with petroleum and its derivatives, while also increasing population with that cheaper food. There is no smooth way to transition people from living in the relative luxury of cheap food (from cheap oil). They not only don’t WANT to do the manual labor of growing food but many would simply die trying because they are living on borrowed time and empty calories.
      The fundamental attitude that people can be useful (re: immigration policies) has also been replaced with one of people being only an expense or burden on some magical debt-money based model of civilization. Since debt is a promise to burn resources in the future at a specific rate, there is no path that I can think of which allows declining resources to expand real available capital. We could possibly revalue/reorganize people so that their hands and brains add instead of subtract from the future resource base, but the timing is all wrong compared to declining oil supplies and declining weather stability. We can’t feed them without the oil they can’t replace with the labor they can’t do.

      Where are we going, and why am I in this handbasket?

  • thomas3

    A price-driven drop-off in frac’d oil production may not be so quick to happen as some suggest. Witness the situation with frac’d natural gas production: NG prices have been far below frac’d gas production costs for several years now. Yet NG production in the US seems to carry-on with very little, if any, decline in NG supplied. Only recently have we started to see major declines in NEW drilling for tight NG.

    One reason seems to be that some frac’d NG land deals include clauses where any prolonged failure to produce on the land can result in a complete forfeiture of the lease. So at least some of the tight NG producers are essentially “forced” to continue production regardless of price – unless they want to completely throw in the towel on their often expensive land deals. And producers (along with their creditors) may simply see partial payment on their large debts as being better than no payment at all. This same factor may also apply in the frac’d oil land deals – but that remains to be seen.

    Another factor in continued NG production seems to be the tie-in with frac’d oil, where
    oil production, especially in the Eagle-Ford and similar fields, includes an unavoidable NG component, dissolved into the crude oil stream (under pressure) and thus NG is produced along with the liquids. This last factor may not apply in the case of frac’d oil – except in the event (presently unlikely) that NG prices manage to rise above NG
    production costs to produce a like effect of high gas prices driving continued oil production, in spite of poor market conditions for such oil production.

  • Simon linientreu

    Even without any of the issues of violence and disruption in places like Iraq and Venezuela, I predict that supply will slowly begin to underwhelm the rising demand. Simple population growth, along with attempts everywhere to revive economic growth, will ensure that oil is kept being coaxed out of the ground. As with any finite substance, once the easiest sources are exhausted, the remainder is scarcer, more expensive, and more dangerous to obtain.

  • Aaron Rosenzweig

    Maybe we should reconsider how many “horses” we need for everyday transportation. Most autos have 200 or more horses under the hood. If they were real horses, think how expensive they would be to maintain and how much poop you’d have to clean up. Oil is only “cheap” right now because we undervalue it. Seems like we should consider lighter vehicles, perhaps without doors and body panels, that could get us around real well with less than 4 horse-power.

  • Dagmar

    oil prices don’t have anything to do with oil production

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