National Commentary

The Great Energy Transition: When Will Oil Production Peak?

Someday we will no longer be able to extract, at affordable costs, the fuels needed to keep our economies growing. That day may be months, years or decades away, but it will come. How well we are prepared for the peaking of first oil, then natural gas, and finally, coal production will determine the disruption and hardships that will face us when the peaks are reached. The three fossil fuels — coal, oil, and natural gas — currently supply some 85 percent of the energy that supports our lifestyles. Despite increasing amounts of non-polluting renewable energy, the use of fossil fuels is still not declining fast enough to slow the deterioration of our climate. Global warming and the availability of affordable energy will be challenges to the survival of our societies in the coming decade or two.

For those with an appreciation of the remaining size of the earth’s proven fossil fuel reserves, and the current and future rate of their consumption, know that our oil reserves seem to be the most vulnerable to running short before natural gas or coal. Given that 95+ percent of the world’s transportation uses oil, any economic growth that takes place after oil production peaks will have to be supported by increases in efficiency or other sources of energy.

Although there were warnings that we would run out of oil 100 years ago, this was decades before the extent of the earth’s oil resources had been surveyed and new technologies which enabled us to extract oil from deep under the sea, the frigid Arctic wastes, and more recently from geologic formations known as shale. The modern concept of peak oil came in 1956 when a geologist, M. King Hubbert, published a prediction that peak oil would occur around 1970. Although conventional oil production in the U.S. did peak around this time, Hubbert, like his predecessors, was premature as substantial new sources of oil were soon found to be producible from the Arctic and deep under the sea.

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The next milestone in the peak oil story was the publication of an article in Scientific American back in 1998 by two respected European geologists, Colin Campbell and Jean Laherrère. They predicted that the peak of global oil production would arrive circa 2007. For a while, this prediction seemed to be reasonable for oil prices took off from less than $20 a barrel until they reached an inflation-adjusted all-time high of $148 in June of 2008. The average U.S. gasoline price hit an all-time high of $4.11 on July 11 that year, and much of the world’s economy went into a tailspin. Most thought the recession that followed was due to irresponsible bank lending, but some believe the price of oil which slowed economic activity played a role too. Four-dollar gasoline was too much for the average consumer so that global oil consumption dropped, sending prices down to $37 a barrel. However, within two years demand for such cheap oil returned the price back over $100 a barrel.

At the time, many of us thought we were about to the peak in global oil production, but mother nature had one more trick up her sleeve: shale oil. The technology of drilling and fracturing tight geologic formations had been around for many years but had always been deemed too expensive. With a selling price of oil above $100, many small oil companies rushed to explore shale formations and indeed found an unbelievable amount of oil. The U.S. is now producing some 8.5 million barrels of shale oil per day, and some are predicting that U.S. shale oil production alone will go considerably higher. There is only one sour note in this otherwise happy story — shale oil costs more to produce than it sells for, and currently only 10 percent of the shale oil drillers are making a profit. In the 10 years America has been producing shale oil, most drillers have lost money every year yet continued to drill ever more shale oil wells on borrowed money. In the last decade, bankrupt shale oil drillers have spent $184 billion more than they earned and cost Wall Street lenders $100 billion in bankruptcies. There is no end in sight to the hemorrhaging of investors and lenders money. Our financial institutions have been mesmerized by ever higher production and ignoring the costs. The shale oil boom will be coming to an end as the reality of endless losses becomes apparent to lenders and investors.

To summarize the current situation: Conventional (non-shale oil) production has been mostly flat for the last 10 years with falling output from depleting oil fields offsetting output from the few countries still increasing conventional oil production. U.S. shale oil production, which is now approaching 9 million barrels per day, may be leveling off because Wall Street will no longer lend to losing firms. Only one U.S. shale oil region, the Permian Basin in West Texas and New Mexico, is thought to have good prospects for growth. Major oil companies, such as Exxon and Chevron and Occidental, are moving to take over much of the Permian Basin’s oil production saying the big oil companies are much more efficient than small drillers and can produce shale oil at a profit.

Finally, we have climate change, which for the past few years has been tearing the U.S. and many other places apart.

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To Be Continued…

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