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Friday, April 3, 2015

Why Would Corporations / Nations Leave Billions or Trillions of High Margin Dollars on the Table??? They Wouldn't!!!

Sometimes the inclusion of a topic becomes so polarized that debate, discourse, and finding some resolution is almost impossible.  Politics, religion, “climate change”, abortion…and today’s topic, Peak Oil.

Many will scoff at the mere mention and even more scoff at the timing of such a notion as oil prices have presently fallen about 66% from their all-time peak and the world is at present drowning in oil.  In fact, seems we’ll likely soon run out of storage for all the excess.  The combo of max'd out storage capacity, slipping global demand, and continued record production may push oil's price appreciably lower.

And yup, I’m still talking ‘bout peak oil…well, not exactly peak oil but more specifically global peak oil production.  I know I nor the EIA are qualified to put an accurate number on future extractable oil and future technological breakthroughs so we'll only judge peak oil by its production.

So what the hell is my point?  Well, a funny thing happened from 2005 ‘til now…while the price of crude ramped from around $35 barrel all the way to $147 (and hung in excess of a $100 for about 3 years before finally crapping out in late 2014).  For some strange reason outside of the US / Canada, global oil production rose by only 2.8mbpd.  That is an increase of about 4% for all global producers (x-US / Canada).

The chart below shows that global production (ex-USA and Canada) stalled since 2005 and the US and Canada are nearly responsible for all global production gains since 2005.  Typically, as noted on page one of just about every econ 101 textbook, higher prices incent producers to bring more product to market until a balance is found.
Source, US EIA

Seems strange that over a 10 year period of record high oil prices every nation or corporation with excess capacity or known reserves (outside of US / Canada) wouldn’t bring that product to the market to take advantage of the 300% to 400% price increase?!?  What amazing margins must be available if they could just push a little more oil to market!!!  For example, if Nike could sell all the Air Jordan’s or Air Force 1 they could produce and do it for 300% more…they would find capacity.  But global oil producers (x-US/Canada) did not in any meaningful way.

Why global oil producers (x-US/ Canada) did not increase production is a question I’m not qualified to answer.  But there must be some folks deep into the deep oil world who have a pretty good idea.

I'll throw out some ideas and hope for smarter folks than I to jump in.  For starters, I think we can rule out a lack of technology could really be the differentiator.  If Shell or any corporation knew how to profitably extract shale oil in the US, over the ensuing decade they would replicate the technology across all their known global reserves to maximize their profits.

So, I see two plausible options:
  1. That existing high quality fields were retiring faster than new (typically lower quality) fields could be brought online?  Or...
  2. Producers had capacity and known reserves but chose not to take advantage of the higher prices?  This seems far-fetched that a global agreement to hold down production could be agreed upon and maintained…so I’m leaning toward the thought they didn’t produce more because they couldn’t.
But America and Canada did ramp up production, as the chart below highlights.  The US and Canada combined increased production by 7mbpd.  A 63% increase!!!  The rest of the world, 4%.  The rest of the world missed out on insanely high prices and margins through the roof…the US added rigs to just about every cranny and nook from Texas to N. Dakota and Canada literally scraped untold tons of sand up to extract a little gooey oil from it.  The rest of the world…not so much.  Really makes you wonder just how profitable that oil in the US and Canada was if no one wanted to emulate the miracle of shale and tar sands?
 Source, US EIA

What about Saudi Arabia and OPEC?  Wouldn’t they be incented to bring more oil to market at the significantly higher prices?  In a word, nope!  The next chart clearly shows OPEC peaked its exports in 2005 and has been steadily exporting marginally less since (higher domestic demand outstripping higher falling exports).
Source, US EIA
I certainly can't (nor would I try) to prove peak oil but I sure think global producers not incented by higher prices to produce more oil says an awful lot.  Just something to keep in the back of your mind as the world currently drowns in oil via slowing global demand and record production.


  1. How long would it take for you, personally, to build a dam behind your house to capture rain water? Instantaneous? 3-5 years? All resources take time to evaluate, time to plan, and time to implement. And if you or your neighbor don't have the expertise, probably never.

    "Peak Oil" - time to understand the concept, the origins of the phrase, and the relationship to the current technology of fracturing and shale development. None of the preceding terms can be used in one sentence by anyone of experience in the oil patch with good conscience.

    Peak Oil came from an analysis back in the 1970's of all sandstone/carbonate oil reservoirs currently on production in the world, and made a prediction based on the discovery rate and the declining production from proved reserves for future oil production. Shale production and fracturing was almost unheard of at the time.

    When will people learn that the experts that do this for a living have far more insight into the complexities of the problem, and that the guy on the corner who has a very vocal opinion are not on the same level of expertise.

    Linear thinking - looking for one, or perhaps two, variables is not the solution to solving a very complex problem that may have hundreds of factors, and no real solution when politics becomes involved.

    1. Perhaps more oil could have been pumped but the return on investment must have been poor as they didn't. Perhaps a peak in returns from investment in oil production has been reached? More worryingly, a peak in demand?

      Our financial system does not mesh well with our current reality. This will change, slowly at first and then abruptly. I doubt the next system will prove to be any better. Eventually, that will change too.

  2. Peak Oil theory is alive and well. Not the "end of civilization" story that a few claimed, but the devastating impact of increasingly expensive oil.

    For many decades, oil was "effectively free" -- its price remained flat-lined at roughly $25/bbl (in today's dollars). But as our global population grew, and the "easy to extract" fossils became harder to get. Oil broke its decades of price stability and started climbing really fast. This is considered the onset point of "economic peak oil."

    The beginning of economic peak oil is debated, but many say around 2002. That's when the price of oil started shooting up at roughly 13% per year, year-over-year. During these last 15 years, oil has dropped briefly to $40, and spiked briefly at $140, but the long-trend price, as of mid-2014, is roughly $85. That number represents the "actuarial maxima" profit point of global production, which combines (1) the remaining cheap oil (Saudi, etc.), (2) the mid-priced oil (Alaska, Russia, etc.), and (3) the increasingly expensive stuff (sand, shale, polar, deep-water, etc.).

    But the cheap stuff is depleting faster than many had expected, and the discovery of easy conventional wells is effectively over. And yet global demand continues to rise predictably at roughly 1mb/day/yr. By all major forecasts (IEA, EIA, Exxon, UN, BP, etc.), demand for fossil oil is expected to rise for another 25 years before renewable energy begins to predominate. Most studies put fossil demand peaking around 2040-45 at 110-120mb/day (we're at 90mb/day today).

    Despite years of high visibility paid op-ed pieces (energy is, after all, the world's largest business), "new extraction technologies" (horizontal, fracking, etc.) have not reversed the rapidly rising price of oil. Alas, the burdened breakeven cost of today's shale is around $60/bbl. And that's the "easy to get" liquid. The net global price of oil will continue to rise sharply, perhaps around 10% per year, y-o-y, as it has for the last 15 years.

    As the world population grows from 7B to 9B, and world oil demand rises from 90mb/day to 120mb/day, and oil extraction costs continue to rise, it becomes increasingly difficult to sustain historical GDP growth, especially in industrializing nations like India, China, Nigeria, S America, etc.. This is peak theory 101. We're entering a new global economy defined less by industrial-revolution-style growth (fueled with abundant, cheap resources), but by limits to growth, constrained by the ever-rising cost of economic entry, which is predominated by energy costs.

    Today, oil is at $50/bbl because of an artificial maneuver by Saudi Arabia (another conversation). That price won't last. Historically, oil always returns to trend. Always. But this highlights another critical aspect of economic peak oil. At $50/bbl, the expensive oil drillers (shale, polar, etc.) cannot invest in new rigs, and many "economically marginal" rigs are taken off line. As Saudi continues their non-adjustment strategy, it means that only the most productive shale wells will remain active. And many small, over-leveraged U.S. drillers will fail.

    But it's not just immediate profits and existing rigs that are at stake, it's the essential need for massive amounts of continuing investment in new rigs to keep up with global demand at a manageable rising market price. This is the scourge and reality of peak oil. We've entered into an energy era defined by increasingly volatile price, investment, cost, and return metrics. And when oil becomes this artificially cheap, you can count on a corresponding price spike (>$200/bbl is often cited) at the other end. Some call this the beginning of the "global boom-bust cycle" caused (in large part) by increasingly expensive "peak" oil and depleting natural resources.


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