Category Archives: Peak Oil

Charts du Jour, 17 March 2015: Pump Baby Pump (but Don’t Drill)

I regularly report on the Energy Information Administration‘s monthly US oil production statistics, which show no slowdown in output as yet (see here for latest numbers). Bloomberg, however, has a series of multimedia offerings giving more colour as to what is going on.

First, a nice chart juxtaposing production and rig count numbers (source: here).

Active Oil Rigs jpeg

And for a great animated graphic showing rig count through time and space, this offering (again from Bloomberg) is superb. Below is my screen shot, but to get the full effect click this link here.

Watch Four Years jpeg

Finally, an animation explaining why the crashing rig count has yet to stop production rising. In Bloomberg‘s view, the divergence between rig count and production has many months to run.

National Geographic recently had an article titled “How Long Can the US Oil Boom Last?” which emphasises the longer view. They argue that the US fracking boom is a multi-year phenomenon not a multi-decade one.

But in the long term, the U.S. oil boom faces an even more serious constraint: Though daily production now rivals Saudi Arabia’s, it’s coming from underground reserves that are a small fraction of the ones in the Middle East.

Both the EIA and the International Energy Agency see US oil production peaking out by the end of the decade regardless of short-term oil price fluctuations. Nonetheless, both organisations have underestimated the upswing in tight oil production to date. Overall, it is very difficult to gauge where US production will be in five years time. This is a bigger story than the current spectacular rig count crash, and one I intend to return to in future posts.

Chart of the Day, 1 March 2015: US Crude Oil Production for December 2014

Yesterday, I noted that US natural gas production has yet to reflect the recent prices declines. Today, I am reporting basically the same story for crude oil.

The US government agency the Energy Information Administration (EIA) reports monthly crude oil production with a 2 month lag; December production was published on 27 February. December saw oil production averaging 9.2 million barrels per day, a rise of 17.4% year on year. The two following charts are taken from the EIA’s weekly oil report here (click for larger images).

US Crude Oil Production  jpeg

The chart of futures prices below shows the 50% decline between the summer of 2014 and the beginning of 2015.

US Crude Oil Futures Prices jpeg

As discussed in my post at the beginning of February, it will take another six to 12 months before futures hedges roll off and rapid shale field depletion rates mean that additional capital investment is required in order to sustain production levels. Such investment will only be forthcoming if the new oil price environment is countered by further technology driven cost savings.

My sense is that new investment projects won’t hit their required hurdle rates and so won’t go through. If so, production will first plateau and then fall. As always, we have to let the data speak on this one.

Chart of the Day, 11 February 2015: Is Supply What Done It to Oil (Says Goldman)

“Is supply what done it,” says Goldman Sachs (as reported by Bloomberg; click chart for larger image).

The big take-away: “[T]he decline in oil has been driven by an oversupplied global oil market,” wrote Goldman economist Sven Jari Stehn. As a result, “the new equilibrium price of oil will likely be much lower than over the past decade.”

Decomposition of Oil Price Demand jpeg

Looks authoritative? And, on top of the pretty chart, Bloomberg tells us that Goldman is using a “vector autoregression with sign restrictions”.

Yeah, right. Solid statistical (and thus econometric) forecasts need to be founded on known and stable relationships–we have neither (we rarely do in macro). Supposedly, Goldman knows that if demand is X (holding supply stable), price will likely be Y. Or, if supply is W (holding demand stable), price will likely be Z. And then a dynamic multi-factor model can be created to bring everything together.

But for oil, we neither have a good idea of what the underlying relationships look like nor, more importantly, do we understand how they evolve through time. As proof of my scepticism, recall that Goldman was predicting high oil prices just over a year ago (spot the oil forecast; source: Business Insider; click for larger image):

Goldman Sachs Macro Forecasts jpeg

Perhaps I am being too harsh. Goldman’s supply and demand decomposition does give us a cloudy window into past price movements, but it certainly won’t give us a reliable vision of the future. In reality, the prognostications of market strategists are a form of economic story telling. And the best story tellers get paid the most. In certain aspects, humanity has not come that far from 10,000 years ago.

Chart of the Day, 8 February 2015: The Primordial Soup of US Renewables

If you like charts (as I do), and you are interested in all things energy and climate change, then the annual Bloomberg New Energy Finance‘s “Sustainable Energy in America Factbook” is an absolute treat. The 2015 edition came out last week.

While the United States does not have a Climate Change Act like the UK, it does have top-end academic research, government-backed blue sky thinking (via the Advanced Research Projects Agency for Energy), lots of entrepreneurial zeal, a deep well of venture capital funding and a multitude of innovative state-led renewable initiatives. Just as the primordial soup of complex molecules on early earth once gave rise to the chemical combinations that we call life, so we hope that the US renewable melting pot will also give birth to something transformational.

Of course, we are not there yet. And Voldemort is well represented in the US care of the anti-science Congress and a fossil fuel lobby that makes the tobacco giant lobbying of the 60s and 70s look like amateur time. But let’s stay upbeat. For a start, King Coal does appear to be in full retreat (click for larger image on all charts).

Electricity Generating Capacity by Fuel Type jpeg

Further, investment continues to pour into the renewable space at a rate 10 times higher than a decade ago:

Renewable Investment jpeg

With the exponential explosion in solar capacity particularly encouraging.

US Solar Roll Out jpeg

I could go on.

Nonetheless, for the US to lead the world into a post-carbon age before we are committed to extremely dangerous climate change still requires a step change upward in renewable investment. But the building blocks for a renewable revolution are there, they just need to be put in the right order.

Chart of the Day, 3 Feb 2015: US Shale Oil and the Coming Production Cliff

The impact of shale oil, otherwise known as tight oil or light-tight oil (LTO), in the United States is indisputable. Aggregate production (conventional and non-conventional) is now almost level with its 1970 peak (click for larger image) with shale leading the oil rennaisance.

US Field Production of Crude Oil jpeg

The latest figures (which go up to November 2014) from the Energy Information Administration (EIA) released at the end of January are yet to show a slowdown in growth despite the oil price collapse illustrated below:

Crude Oil Spot Prices copy

Indeed, US production was 9 million barrels per day in November, a rise of 14.5% over the same period the previous year

How long will it take for production to adjust if crude stays around $50 per barrel? As I’ve mentioned before, shale is an industry with high upfront costs but relatively low operating and maintenance costs. The upfront costs are already ‘sunk’, so the ‘pump’ or ‘don’t pump’ break-even point is as low as $10-20 per barrel. Moreover, many producers hedge to varying degrees. To get a taste of this, here is part of a table on listed shale oil producers published at Seeking Alpha.

Oil hedges jpeg

Once these hedges roll off, profit margins will collapse. Meanwhile, the output of shale wells declines by around 60% in the first year; therefore, sustained production requires continuous new investment. And new investment requires a decent return on investment. Reuters has a good article by John Kemp on how this dynamic works.

Bloomberg New Energy Finance estimates that to sustain current levels of shale oil production would require a return on investment of 10%, but to increase production would need a 20% return (see their White Paper here). Using these rates, they then go on to look at what oil price is required for each region to get such returns (click for larger image).

Breakeven Points for US Shale Plays jpeg

Based on these calculations, the US oil industry will fall off a cliff should the oil price remain below $50 for more than a year.

Bottom line: shale oil has not killed peak oil, but cheap oil will kill shale. The only way this won’t happen is if the oil price moves back up again–which I forecast it will.

As Colin Campbell and Jean Laherrere said in a prophetic 1998 article in Scientific American, “The world is not running out of oil–at least not yet. What our society does face, and soon, is the end of abundant and cheap oil on which all industrial nations depend.” As I said yesterday for natural gas, to prove Campbell and Laherrere wrong we need to see low oil prices and rising production–not one without the other. It’s a simple test. Let’s see what happens.

Chart of the Day, 2 Feb 2015: Still Talking about a Shale Gas Revolution?

The US government’s Energy Information Administration (EIA) has just come out with US natural gas production figures for November. But before we look at them, let’s glance at the long-term chart first (Source EIA here):

US Natural Gas Monthly Supply jpeg

Looks good if you are a fracking enthusiast, although the chart makes the shale gas surge seem like one continuous, seamless event. Scale up to the monthly chart and the situation looks a bit more nuanced:

US Dry Gas Production Nov 14 jpeg

For two years, 2012 and 2013, production almost flatlined, before jumping up again at the beginning of 2014. The latest numbers show dry gas production for November up 6.2% year on year, and the twelve month average rose 4.6%. What explains the two-year hiatus in the shale gas revolution? That’s easy: price (Source: Nasdaq).

Natural Gas Futures jpeg

The Holy Grail for shale gas enthusiasts is rising production and cheaper prices. In reality, however, what we have seen is rising production when prices are high, but stagnating production when prices fall. We haven’t really seen the same dynamic for tight oil in the US because we haven’t seen a prolonged period of falling prices–until now.

Meanwhile, the EIA’s latest Short-Term Energy Outlook (STEO) , released on 13th January, contains new forecasts that extend out through 2016 . The outlook is for a short plateau, then a renewed upward move:

STEO Jan 15 copyTo be honest, foresting oil and gas markets is a nightmare, the reason being that you are actually having to forecast two interlocking variables: price and production. Keeping that caveat in mind, here is the EIA’s price forecast:

Henry Hub Natural Gas Prices

The chart is a little difficult to read, but the EIA is looking at $3.44 per million Btu in 2015 and $3.86 in 2016. This compares with an average of $4.39 in 2014.

Putting price and production together paints a pretty optimistic picture from the EIA. Previously, the slump in prices in 2011 led to a plateauing of production in 2012. Further, a jump in prices in 2013 resulted in reinvigorated production growth in 2014. Of course, technology is changing, and this relationship may not hold. Indeed, that is what the EIA argues (from the 13th January STEO, click for larger image):

STEO Gas Production Commentary jpeg

There are a lot of moving parts to the story. I haven’t touched upon the implications for associated natural gas (gas produced as a byproduct of drilling for tight oil) stemming from the oil price slump. Nor have I dealt with the big spat between the journal Nature and the EIA over shale gas reserve calculations. More to come on both of these topics in future posts.

Overall, though, remember the “peak oil” theory is really one of peak cheap oil (see my posts here and here). and you can extend the same logic to gas. Consequently, the cornucopians have a golden opportunity to nail the peakists if they can show one thing: that the world can produce more oil and gas at the current low oil and gas prices. We have a testable hypothesis–let’s see what happens.

Chart of the Day, 28 Jan 2015: Oil, Cornucopians, Peakists and Jeremy Grantham

The stunning collapse in oil and metal prices since last summer (see yesterday’s post) has brought the cornucopians and abundantites crawling out of the wood work. From an (otherwise very good) article in The Economist of 17th January titled “Let there be light”.

An increase in supply, a surprising resilience in production in troubled places such as Iraq and Libya, and the determination of Saudi Arabia and its Gulf allies not to sacrifice market share in the face of falling demand have led to a spectacular plunge in the oil price, which has fallen by half from its 2014 high. This has dealt a final blow to the notion of “peak oil”. There is no shortage of hydrocarbons in the Earth’s crust, and no sign that mankind is about to reach “peak technology” for extracting them.

Frankly, this is just sloppy thinking from The Economist: the second sentence, which talks of a “final blow” to the notion of peak oil, doesn’t follow on from the first.

In short, the paragraph muddles the short term and the long term. Why is a fall in oil prices barely six months’ old a “final blow” to the notion of peak oil? And while fracking shows we are far from “peak technology”, it says nothing about price. Can tight oil keep coming to market for years to come at current prices? I think not. For a longer treatment of oil supply versus oil demand, see my more detailed post titled “Has Shale Killed Peak Oil“.

One of the most vocal advocates of the ‘peakist’ or ‘depletist’ hypothesis is Jeremy Grantham, who has used The Quarterly Letter of GMO as a platform for his views. The chart below is taken from The Third Quarter 2014 letter (click for larger image):

U.S. Average Hourly Manufacturing Earnings:Oil Price per Barrel jpeg

Grantham points out that in 1940 one hour’s work for an American engaged in manufacturing could buy 20% 0f a barrel of oil. At the twin peaks of oil abundance–1972 and 1999–the same wage could buy over a barrel of oil. But those days, he argues, are long gone. According to Grantham, this has implications for not only oil markets but also for the energy underpinnings of global economic and productivity growth.

Yesterday, I also argued that the rapid slowing to the Chinese economy was the likely culprit behind the havoc in commodity markets rather than a breakthrough in one particular extraction technology. As evidence, I noted how iron ore and copper prices had collapsed along with the oil price, despite the fact that you can’t frack for copper and iron ore.

The critical question now is what will happen to supply in the face of sluggish demand. Tight oil production is dramatically different from traditional oil production due to the accelerated nature of the depreciation schedule. Fracked fields deplete quickly, so to maintain production you must continually invest. If you don’t, aggregate production falls fast–that is, within a year or two. So we won’t witness a decade long excess capacity work-out as you would have seen in previous oil price busts: supply should adjust to demand at breakneck speed this time around.

Consequently, while we are not at “peak technology” for oil extraction, we possibly are at “peak cheap technology”. If so, forget all talk of “final blows” to peak oil.