The Peak Oil Crisis: Supply Shock

May 15, 2013 3:28 PM8 comments

A new phrase, “supply shock,” entered the lexicon of the global oil business this week when the International Energy Agency reported that unexpectedly rapid growth in tight oil production from North Dakota and Texas is leading to profound changes in the global energy markets.

U.S. oil production which grew by 800,000 barrels a day (b/d) last year is now expected to grow by another 2.3 million b/d by 2018. In addition another 1.3 million b/d increase from Canada’s oil sands is expected. This 3.9 million b/d accounts for nearly half of the 8.4 million b/d increase in global production of combustible liquids that the IEA is expecting to be available by the end of the decade.

This rapid increase in North American oil production is expected to outrun the growth in global demand during the next few years, which is forecast to grow at about 900,000 b/d annually – at least in the near term. This implies that the demand for OPEC oil exports during the next five years is likely to be weaker than had been expected. The Agency predicts that OPEC will gain an additional 2 million b/d increase in its spare capacity during the next few years. Growth in the domestic oil supply has already resulted in major reductions in US imports from West Africa which are now flowing to China and other Asian nations.

Needless to say, these new forecasts have the U.S. financial press in ecstasy with predictions that the U.S. will soon become the world’s largest oil producer and could be energy independent by 2020 – if you throw in Canadian tar sands production and lots of pipelines to the south. Some even have US output reaching an all-time high of 11.9 million b/d by 2018. There is a growing consensus that we won’t have to worry about all those petty sheiks and dictators controlling our gasoline, and we can all forget about oil shortages and perhaps even high prices – at least for the next five years.

Now all this is probably good news for it gives the world’s oil situation a few years of breathing space; helps the U.S. balance of payments; creates jobs; and unless you live downstream from some of the fracking operations or note the ever increasing buildup of CO2 in the atmosphere you should probably be happy with the news.

Like with most things, however, there is another side to the story – for simply talking about a few years of rapid increases in U.S. oil production does not tell the whole tale. As we should all know by now, oil obtained from hydraulic fracturing and from Canada’s tar sands is very expensive oil. As time goes on it will become still more expensive for the best spots are exploited first and costs of production will continue to increase. The only reason we can afford to exploit tight oil and tar sands oil is that prices have been holding close to $100 a barrel in recent years.

We should also all be aware that tight oil wells dry up much faster than conventional ones. The best forecasts by independent geologists, that are free to talk about their findings, is that America’s tight oil bubble only has another three or four years to run and that production will peak at about 2.3 million b/d circa 2017. This says that in four or five years US tight oil production will start to decline, unless somebody can work out the issues involved in exploiting the tight oil that is reported to be under California – a decidedly different place to drill wells than in North Dakota or south Texas.

In addition to production and the cost of oil, there are at least three other factors that could overwhelm the significance of a few million barrels of increased U.S. production. The rapidly deteriorating Middle Eastern situation is number one. Some 20 million b/d of the global oil supply currently comes from the region, and nearly all of the oil region’s oil exporters have a finger in the current turmoil.

The next issue is the condition of the global economy over the next few years. Europe is in bad shape and, except for the occasional flurry of optimism, the U.S. is really not doing much serious “recovering.”

Our last major issue is emissions from the combustion of fossil fuels which has two parts – hazardous particulate matter in the air and the continuing atmospheric CO2 buildup which has now hit an extraordinary 400 parts per million.

While most developed countries have taken steps to ameliorate the dirty air problem in recent decades, the Chinese have largely ignored air quality in their quest for high rates of economic growth. The situation in Chinese cities has become so bad that Beijing now seems on the verge of foregoing some growth in favor of cleaner air. How this will play out in terms of China’s consumption of fossil fuels in the coming decade remains to be seen, but the spectacular annual increases in oil consumption may be slowing soon.

Of even more importance are the CO2 emissions which many believe are behind the increasing unstable weather besetting the world in recent years. While the simple answer to this is major reductions in the combustion of fossil fuels, for now global sentiment clearly favors increased consumption of fossil fuels as a means of maintaining and improving lifestyles. Just when atmospheric conditions become so bad globally that sentiment changes will be one of the major issues of the next decade.

Don’t break out the champagne just yet. The fundamental premise of peak oil that the world’s supply of affordable oil is limited and will become increasingly scarce is still alive and well. Gas prices are unlikely to go down very much and in a few short years, or less if the Middle East blows up, we will be back to worrying about shortages.

Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.

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  • tahoevalleylines

    “The rapidly deteriorating situation in the Middle East is number one”…. Hmmm. Putting Matthew Simmon’s “Twilight In The Desert” warnings aside, let’s look at manmade threat to happy motoring.

    To study the Middle East is to realize just how tenuous our rubber tire based economic model really is. If you do not understand the ramifications of the current line-up of armies & armor, and the naval game of “Battleship”, then you are simply in la-la land. For a quick read, see old Hebrew Scripture Isaiah Chapter 17. Consider that ancient writ as you investigate modern M.E. war consequence articles from the Institute for Strategic & International Studies.

    Mohammedanism has removal of Israel as Job #1. When the oil supply chain is disrupted, America will be required by NATO treaty to make up shortfall to allies as best we can. The Katrina hits to US oil supply were quietly made up with large oil supply shifts from EU reserves to the US. We are obligated to reciprocate when the EU is cut short by the Middle East upheaval. With or without Israel in the mix, Islam has its own list of feuds; see Avi Lipkin’s ‘ The Return To Mecca”. Another book: “The Harbinger”, is specifically for American planners…

    American economic prosperity hinges on ability to maintain food and manufacturing production, and DISTRIBUTION. We must replicate the freight railway matrix as seen circa 1950 with all due haste. Back to you, Tom

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  • http://twitter.com/NewSocietyPub NewSocietyPublishers

    Thank you Tom for this most excellent article. I had been wondering what the real story behind the “supply shock” news was and you very clearly explain it.

  • GJPinks

    Please keep promoting peak oil economic disaster, it hasn’t happened in the last 60 years, but don’t worry, I am convinced that one time in the next 3,000 years it will finally happen.

    • ThomasXxs

      Just wondering if Mr. G.J.Pinks can recall the economic turmoil and the commerce-clogging “gas lines” of 1973? (NOTE: 1973 was ~40 years ago, and ’40<60'). That sudden public display was based upon a deep and growing US dependence on OPEC-controlled oil supplies from the Persian Gulf region, and it followed closely behind the peaking (and the subsequent long decline) of US oil production from December 1970 forward. This was (and still remains) the all-time yearly peak in American crude oil production. And this bold prediction stands as a famous and now legendarily accurate prediction (made back in the mid-1950's!) by a brilliant oil industry "insider" named Dr. M. King Hubbard, who then worked as a senior Petroleum Geologist for SHELL Oil.

      • GJPinks

        Almost every year has ended with more world wide projected oil reserves than the year before. In areas never explored before or depth unreachable a few years before. US oil exploration lagged and “declined” because of cheaper oil elsewhere and increased government restrictions (see cheaper oil). Many productive wells were capped because the lease holder could make more money moving their equipment to other locations. Many of these leases are now expiring allowing the property owner to re-open to new leases. Additionally Fraking has improved greatly over the past 60 years with new “steerable” drilling systems.

        Plus Oil is not created by rotting dinosaurs and forests, but by ongoing processes, so for all intents, oil continues to be created.

  • kenroyall

    Shut up.

  • http://xeeme.com/MrEnergyCzar MrEnergyCzar

    More expensive oil being added to the market almost assures us we won’t grow our cheap oil addicted economy….

    MrEnergyCzar

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  • geolog

    What is our choice: Innovative exploration technology or petroleum industry crisis?

    David Bamford states in “Finding Petroleum”, January 03, 2014 :
    1. ‘Mature’ NW Europe, whether in the North Sea or onshore, has had a dismal exploration record.
    2. There have been several high profile failures in new ‘Frontier’ basins, for example offshore French Guiana, Brazil, Namibia…
    3. The costs of offshore, especially deep water, drilling have ‘gone through the roof’.
    4. Development projects – of those discoveries that have been made – are increasingly seen as being behind schedule, overrunning budgets and not delivering the promised production.

    “There are warning signals,” Oeyvind Eriksen, the acting CEO of oil services group Aker Solutions said. “It is a combination of a stable oil price and increased costs and that puts pressure on net cash flow. Projects that were profitable in the past become marginal today.”
    Drilling results on Norwegian Continental Shelf show “dismal exploration record” the same:
    about 45 exploration wells were drilled in 2013 year practically without commercial discovery (www.npd.no)
    The picture can be added by example from Brasilia : “Batista, the world’s eighth richest man a little more than 18 months ago, is no longer a billionaire. In late October, OGX Petroleo & Gas Participacoes SA, the oil and gas exploration company he once controlled, filed for bankruptcy protection in a Rio court”. His offshore exploration campaign with expenses $4.6 billion provides production about 20,000 boe a day, only 3% from promising.
    It is clear that it is more than“warning signals”, it is signals about real danger of coming world crisis – crisis of petroleum industry failure. This crisis will be much harder than financial crisis of 2008 year.
    Basis of petroleum industry is natural reserves of hydrocarbons (crude oil and natural gas) concentrated in geological formation on different depth (600-20,000 ft). In the process of product extraction the reserves go to depletion and companies need to find and discover additional reserves. But conventional exploration technology can not indicate were hydrocarbons really is before drilling. The problem is in right answer the question : What fluid is in seismic prospect – hydrocarbons or water? How right conventional technology answers the question we can see from results: to-day to get one commercial discovery we need drill more than 10 wells. It is too expensive.
    I would like to inform you that there is innovation proven technology which can get 7-8 commercial discovers from the same drilled 10 wells (www.phenomenon-in-oil-accumulation.weebly.com)
    It will allow to fill of reserves shortage, support petroleum industry and stop the crisis.
    Thank you for attention.
    Dr. Andrey Berg, vice president
    Elkin Geophysical,
    geologberg@yahoo.com
    San Jacinto, CA

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