Sunday, March 03, 2013

Lower highs: The real trajectory of U.S. oil production

The way the oil industry is touting gains in U.S. crude production, you would think that production is soaring to new all-time highs. But the facts say otherwise. Below is a monthly plot of U.S. crude oil production through December 2012.

US_Oil_Production

U.S. production remains well below the peak achieved in 1970 and below a secondary peak in 1985—a lower high, if you will—which resulted from the ramp-up of production in Alaska. But since then production has gone relentlessly downhill until just recently.

It is true that a new form of hydraulic fracturing—high-volume slick-water hydraulic fracturing—has made available sources of oil not previously accessible. But it is also true that the industry’s hyperbole doesn’t square with the evidence. The U.S. Energy Information Administration’s (EIA) latest estimate of technically recoverable oil from so-called tight oil deposits—the ones made accessible by this new type of hydraulic fracturing—is 33 billion barrels (see below). It sounds like a lot. But, in fact, it would only supply the United States for about 6½ years (assuming current net annual consumption of about 5.1 billion barrels). Not bad; but not a world-changing number, especially when you consider that all oil goes onto a world market where 33 billion barrels would last a little over a year. Beyond this, the estimate says little about how much of that oil will ever be economically recoverable. Wherever it isn’t, no one is going to extract it.

EIA Tight Oil Table 1

But there is another column in the EIA table above that is worth focusing on, the one labeled “% of Area Untested.” We don’t yet actually know that much about the potential for the country’s tight oil (often mistakenly referred to as shale oil). In some areas drilling has only just begun, and in others there’s been no drilling at all.

There is reason to believe that things may not go as planned. In the areas already drilled, drillers have focused on a few sweet spots that have proven profitable. That makes perfect sense. But, it suggests that they must now venture beyond those sweet spots to find additional supplies from deposits that will be more refractory and thus more expensive and difficult to exploit. No one is certain how drillers will fare. But logic suggests that production growth will slow and then at some point stop—after which a production decline will begin in earnest.

The EIA projects that U.S. oil production will peak later in this decade—a little below the previous secondary peak in 1985. That would result in a tertiary peak, or yet another lower high. In the meantime the extra supply promises to lower America’s bill for oil imports. But the modest turnaround in America’s oil fortunes won’t solve the larger problem of worldwide oil depletion which, despite American gains, has kept worldwide oil production on a bumpy plateau since 2005.

We live in a global oil market, and that market remains tight as is evidenced by an oil price hovering around $90 in the United States and $110 in Europe, the latter price being more representative of what most people pay.

For obvious reasons the oil industry doesn’t want us to think about weaning ourselves off oil anytime soon. They believe that if they can convince us that oil is abundant, we won’t even try. But oil prices have been telling us for almost a decade that supplies are much tighter than the industry is acknowledging. And, the facts about U.S. oil production tell us that if there is a revolution going on in American oilfields, it is only a minor one, and one that will soon be reversed.

That doesn’t leave us much time to prepare for a world in which oil supplies are almost certain to dwindle globally as the current plateau in worldwide production turns into a decline. And, that will be a problem for everyone including the United States, a country that remains the planet’s largest importer of crude oil.


Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

11 comments:

Rob Ryan said...

There's nothing that I can see in your post that is erroneous, but just as the US produces oil into a world market, it's also the case that the US is not the only country with tight oil resources that are likely economically recoverable, albeit at prices like today's that we don't like. My understanding is that China is estimated to have the world's largest tight oil reserves.

What would an analysis looks like that captures these worldwide tight oil resources?

I'm no polyanna, but I think that looking only at US tight oil plays underestimates the potential of tight oil to provide the energy bridge to get us to the necessary sustainable energy future.

Kurt Cobb said...

Rob Ryan points out correctly that other countries have tight oil deposits, but he is a little careless in his terminology calling them "reserves."

The resource may be large, but reserves--which are something that can be produced at current prices using existing technology from known fields--have not been demonstrated to be large. Perhaps they will be. But if the experience is anything like that of the United States, the wells will decline rapidly putting drillers who want to grow production essentially in the position of trying to go up a down escalator the speed of which is increasing.

Now,I haven't even talked about decline rates for existing wells worldwide. The world's 100 largest producing giant fields produce half the world's oil. They are growing very long in the tooth; many are over 50 years old. I am skeptical that when these start declining that the frankly pitiful amounts available from the average tight oil well will be able to make up for this decline even under optimistic scenarios for tight oil production.

Given that tight oil production is getting a delayed start around the world, we may already be into the kind of decline I describe before those supplies become available.

I'm not saying they will make no difference. Clearly, they will. But that will not solve the problem of increasing declines from existing fields, nor will it likely overcome those declines.

If that's true, then global net exports will continue to fall and importing nations such as the U.S. will find it much more costly to secure imported oil.

Certainly, if you assume that aging giant fields will never decline or at least not decline much for the next couple of decades, you can make a case for tight oil contributing to a rise in the rate of world production.

I just don't think it's good public policy to count on such good luck when already all the optimists have been completely discredited in the last decade.

(Of course, that doesn't prevent the same people who told us oil prices would go right back down to $20 or $30 a barrel and stay there from yapping on the airwaves. I only wish someone would remind them of their failed predictions and ask why we should believe them now.)

Anonymous said...

Very interesting take. However, this is just one side of the equation. In considering supply only, you don't touch on the fact that demand is on a increasingly downward trajectory. When cars become more efficient the marginal cost declines as well. High oil prices have propelled record hybrid sales.

Doug said...

Kurt,

Informative article, thanks for a cogent and well thought out point of view. However, I wonder how much more enlightening it would be if the price of oil was normalized for inflation (i.e. if the price of oil was given in real terms, not nominal terms, both domestically and globally).

rtcdmc said...

I understand that the author is a firm believer in "peak" oil, but the complete discount of technological advancements (as in the article) is the cause of the "peak-oil" crowd failing to anticipate the fracking-related increases. Saying that some oil will never be extracted is willful ignorance. When looking at the production increases in the U.S. and elsewhere, as well as the declining rate of oil consumed per unit of economic output, one could reasonably conclude that the economy could see a period of stable energy. That should be good news, but apparently isn't in the author's view.

Kurt Cobb said...

Commenter rtcdmc apparently doesn't understand that peak oil isn't a question of belief, but rather of evidence. Individual wells peak, fields peak, and countries peak. In fact most of the world's oil producing countries have flat or declining production. World oil production will peak at some point. We just don't know when.

In fact, conventional oil--what I call the "Beverly Hillbillies" oil, the easily flowing liquid crude and the stuff that peak oil theorists were actually tracking in the past, appears to have peaked in 2006 according the International Energy Agency. By that metric they were very close to mark as several conventional oil peak projections were for the 2005 to 2010 time period.

Now, we are left with the difficult-to-get unconventional sources. They cost more to extract and often to refine and they therefore come out at a slower rate. And, that is the key metric: RATE of production.

No matter how large a resource is, if you can't get it out at the RATE we need to keep the global economy going, there is going to be trouble.

rtcdmc also claims that I said "some oil will never be extracted." There is no place in my piece or in my comments that I said this. It is worth noting, however, that 65 percent of all the oil ever discovered remains in the ground because it is either inaccessible or too expensive and difficult to extract. Perhaps someday we will get the rest of that oil, but it will not likely be at the RATE that we extracted the first 35 percent.

He also claims that production is rising in the "U.S. and elsewhere." But, of course, he doesn't specify. That's because very few countries are increasing their production: Canada, Iraq, Angola, Brazil come to mind, but I'd be curious to know of others, if he can point to them.

In fact, the list of countries in which production is declining is much, much longer.

Apparently, he also thinks that I would somehow not welcome a period of energy stability for the United States and the world. I most definitely would. But I am highly skeptical that oil will give us that stability.

Given its history, record high average prices for Brent Crude, the world benchmark for the last two years running, and the bumpy plateau in world production since 2005--despite record exploration expenditures, despite fracking, and despite a dramatic decline in oil use the United States, we should be very skeptical of those claiming that we are now entering a new era of abundance.

If it was going to arrive, it would already be here. The oil industry and their paid spokespersons told us in the early part of the last decade that there was plenty of oil and no one need worry.

When prices rose, they told us that new supply would come on as a result and push prices back down.

And, when that didn't happen, they told us that fracking would now glut the world with oil.

How many times will we listen to such people before realizing that they no longer understand our new energy realities and that if they do understand them, then they are merely being cynical in the most craven and self-serving way?

The facts and our experience suggest that we should try to reduce our dependence on petroleum rapidly and move to a more durable energy regime not dependent on nonrenewable, finite energy resources.

Anonymous said...

Mr. Cobb's right. Someday we will run out of oil. I've never heard anyone deny that. The real question is, when? Five years ago we were being told that we had reached peak oil and the U.S. was continuing an evitable decline begun decades earlier. None of that was true.

So will we run out of oil? Certainly. Is it any time soon? If soon is defined as the next few decades, absolutely not. As has been pointed out, we are essentially in the first inning of exploiting tight oil reserves, so who knows how much and when? I can say for certain, that as technology advances and prices rise, another new leg will be added to the supply of oil, not to mention a much greater exploitation of thousands of Tcfs of natural gas.

Possibly the immutable laws of physics will change and alternative energy will begin to matter, but nothing is on the horizen yet.

Technically, the author is right. In terms of relevance to our day to day lives? Not so much.

Kurt Cobb said...

The previous commenter is keeping me busy. He says that I stated that someday we will run out of oil. First, I never said that in this piece or my comments though every sane person agrees that oil is finite. What I pointed out is essentially that long before oil runs out, the RATE of production will fall for a number of reasons such as geology, high capital requirements, demand destruction. This is not the same as running out, but it is an important and possibly very damaging event.

The commenter ignored the fact the crude + lease condensate, which is the definition of oil, has been stuck on a plateau since 2005 despite the seeming fracking miracle and record investment in oil exploration and development.

This commenter was surely one of those telling us in the last decade that supplies would grow and prices fall. He was wrong.

Now he's telling us that prices will rise and that that will make things all better. But rising prices are an indication of tight supply. So, he's actually embracing the idea that we are near a peak.

I agree that rising prices will make the more difficult-to-get tight oil profitable. But it won't do a thing to stop the decline of the world's existing fields. For some reason, people who love to tell us of our glorious future in the tight oil fields absolutely refuse to talk about depletion of existing fields, as if it didn't matter. But right now that depletion is running 4 to 5 percent each year worldwide. That means we have to find and put into production as much oil as we found in the North Sea and do it each year BEFORE oil supplies can grow. It hasn't been happening. Not since 2005.

One other important question is: How high a price can the world take? I think not too much higher than today since we see the world economy essentially treading water for the last several years in the face of high energy prices, especially high oil prices.

The commenter believes he knows the future of oil supplies for certain. I don't think anybody knows the future of oil supplies for certain. And, I don't think fantasies in the form of predictions or projections or colored charts or incantations using the word "technology" over and over are a good basis for sound energy policy.

Livrare flori said...

What is really important is not that we will run out of oil in the physical sense, but in the economic sense. The price mechanism will ensure that alternative energy will be used more and more as oil reserves fall. However, as we use oil in unproductive businesses, we might not afford to pay the higher price of energy in the future. Which means that we'll get poorer, just as if oil production cannot be substituted.

adk46er5203 said...

Kurt, The next high will probably be higher than the peak in the 80's. The EIA is already predicting 8.84 million barrels a day in Dec 2014. This estimate is actually 600k barrels higher than their estimate in January. I have also seen an estimate of 9.5 million barrels a day for Dec. 2014. I am not sure what will be accurate but I have not heard any org. or person thing the next US Oil peak will be before 2015. If I were a betting man I would bet that the next US peak would be at least 9.5 million barrels a day.

Ken

Kurt Cobb said...

Ken may be right, but readers must understand that he is commenting six months after the piece appeared. He has the benefit of six months more production data and a fresh EIA projection.

I made no claim that U.S. production would peak before 2015. And, I merely cited the EIA projection at the time that it would peak in the late teens. The peak may very well exceed the secondary peak of the 1980s.

But my main point in citing the original EIA projection was to show that at least one official source wasn't buying into the ever rising production for decades scenario being touted by the industry or the oil self-sufficiency nonsense either.