Peak Oil: Is History Repeating Itself, Again?

(Energy Today/OilPrice.com) In 2002, oil prices were hovering around $20 per barrel and then rose almost continuously until mid-2008 when the price of a barrel of oil on the New York Mercantile Exchange hit an intraday high of $147.27, its highest price ever. Throughout this protracted period of rising prices, the world’s best-known critic of peak oil* prognostications, Daniel Yergin, began to look so foolish for having predicted ample supplies and low prices for decades to come. And then his firm finally reversed itself in mid-2008 and began to forecast higher prices.
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On the surface, it seems that the Permian is driving a rock-solid oil market. However, a closer look at the details of the Permian conveys a financial condition that no peak oil thinker could ever imagined. One of the criticisms of peak oil thinking is that it doesn’t take into account economic factors. A second criticism is that it fails to recognize so-called unconventional oil resources such as tar sands, tight oil, heavy oil and arctic oil. Both criticisms are false, at least when it comes to the insight of petroleum geologist Colin Campbell.

As far back as 1996 Campbell recognized that high oil prices would dampen oil consumption and delay or draw out the peak. But neither he nor other thinkers believed that unconventional oil resources could do anything more than soften the rate of decline in worldwide production. The reason was that such resources would be expensive and difficult to extract and would therefore not enter the market quickly enough to overcome the decline of conventional oil production. But here is what peak oil thinkers couldn’t foresee: That investors would subsidize the production of vast amounts of oil rather than seeking a return on their capital and that they would do this year after year even in the face of the obvious financial evidence. Essentially, Wall Street has been subsidizing the consumption of oil on Main Street. That this is unsustainable is obvious. Eventually, investors will realize that there is no long-term value in tight oil. For now, the flood of oil from tight oil formations has conjured the illusion that the world needn’t worry about oil supplies anymore because of the “miracle” of hydraulic fracturing, often referred to as fracking. (Why investors have been cautious about additional investment in the Canadian tar sands, but not American tight oil is a truly puzzling question.) The recent rebound in oil prices should spur some investment elsewhere, especially where genuine financial returns await. But the punishing price decline in oil from 2014 to 2016 and the slow recovery that followed has resulted in deep cuts in exploration and development throughout the industry (if not so much in the U.S. tight oil fields). In response, the International Energy Agency has been waving its arms for some time that this dearth of investment will mean constrained supplies after 2020. In addition, Rystad Energy, an independent energy research firm, reported at the end of last year that 2017 saw a record low in oil discoveries. It noted that exploration expenditures had dropped 60 percent from 2014 to 2017. Without a substantial reversal of this trend, the firm expects supply deficits. (Translation: There won’t be enough oil to go around in the not-too-distant future.)

Meanwhile, writer Gail Tverberg has been pounding home her counterintuitive thesis that peak world oil production won’t be accompanied by high prices. Rather, it will be the result of prices too low for much of the remaining oil to be extracted profitably. In other words, in Tverberg’s opinion there isn’t an oil price that is both low enough to avoid economic stagnation (i.e., a price that consumers can readily afford) and yet high enough to incentivize oil companies to extract sufficient quantities of oil to prevent a decline in the overall rate of production worldwide. It seems the first part of her analysis is proving correct with regard to tight oil production and probably tar sands, deepwater and arctic oil. But the fact that tight oil extraction remains by and large free cash flow negative and yet continues to attract investment has obscured her underlying financial logic.

Investors, however, won’t keep subsidizing expensive tight oil extraction for the benefit of the masses indefinitely. As economist Herbert Stein once said, “If something can’t go on forever, it will stop.” When it does stop, one of three things will emerge:

The first result seems unlikely as innovation cycles are very long in the oil industry, sometimes taking 30 years to reach maturity. The second is possible only in the longer term and only if countries worldwide put themselves on the equivalent of a war footing to speed up their transformation. The third result seems the most probable outcome as the lack of investment in oil exploration is likely to show up in two to three years.

Whether the next oil crisis will mark the all-time peak in worldwide oil production is unknowable. If it does, the reprieve provided by what we now know has been investor-subsidized tight oil will have been a dangerous detour—one that delayed a transition away from oil when the price spike of 2008 and the record high prices of the early part of this decade should have made clear that such a transition was urgent.

* For the uninitiated, peak oil in this context refers to the moment in time when the worldwide RATE of oil production reaches a peak and thereafter enters a permanent but possibly bumpy decline. It does NOT, as many wrongly claim, mean the world will run out of oil. In fact, oil will continue to be pumped as long as human society has a need for it and can afford its extraction. The cost of using oil as our main energy source, however, may be too great for the economy to bear in the long run after the peak. READ MORE

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