1) Oil & Gas
Houston
“Peak Oil”- is that all there is?
According to the Energy Information Administration (“EIA”) in April 2015,
U.S. oil inventories rose by 1.3 million barrels last week to 483.7 million
barrels -- far less than the 3.6 million-barrel increase expected by traders
and analysts. At 483.7 million barrels, U.S. crude oil inventories are at the
highest level for this time of year in at least the last 80 years. Meanwhile,
also in April 2015, the International Energy Agency also increased their
demand growth projections for crude oil this year to a gain of 1.1 million
bpd over 2014 (which gained 700,000 bpd over 2013). Finally, Iranian Oil
Minister Bijan Zanganeh came out this week with a call for OPEC to cut its
production output by 5%, a move favored by most OPEC members (but a
move that has been opposed by its strongest member, Saudi Arabia).
All of the foregoing brings us to the Peak Oil theory. The term “Peak
oil” is the theory that oil production has maxed out and that decline is
therefore inevitable. This theory has had a lot of advocates—even unlikely
ones, such as Texas oil man T. Boone Pickens, who said in 2004 that
“never again will we pump more than 82 million barrels” a day of liquid
fuels (we’ve been at 90 million and up for several years). There was a peak
and a decline, but in the past few years, thanks mostly to the exploitation
of shale resources, there has also been a recovery. Under peak-oil theory,
that cannot happen because oil supply can decrease with only a minor
impact on the economy. The economy will continue along as before, except
with higher prices. These higher prices encourage the production of
alternatives, such as wind, solar, biomass, geothermal and biofuels , shale
in the U.S. and oil sands in Canada.
As we all know, the run up of U.S. crude production and growing
stockpiles have been a driving factor for the oil price death spiral in the
past year and the recent inventory data from the EIA certainly added to
that momentum. As of April 15, 2015, West Texas Intermediate crude
prices have surged 5% to year-to-date highs following a bullish
inventory report.
By Mona Dajani
Mona Dajani is a partner at
Baker & McKenzie in the Chicago
and New York offices and has led
numerous transactions involving
global energy projects, including
renewable energy projects, utility
and infrastructure systems, and
traditional oil and gas plants. She has
worked on projects involving liquefied
natural gas (LNG) facilities, natural
gas liquefaction plants, pipelines
and storage facilities, power plants,
compressed air energy storage
centres, offshore oil production and
petrochemicals facilities.
Dajani contributes to Energy Law and
Transactions, a treatise that discusses
the energy industry - covering all
traditional energy sources, such as
oil, gas, electricity and coal, as well as
non-traditional energy sources, such
as hydroelectricity, solar, nuclear,
biomass and cogeneration - from
exploration and production through
transmission, distribution and final
consumption by the end-user.
2) Sources: API, Petroleum Facts & Figures, 1931; EIA database (pet_crd_crpdn_adc_mbbl_a.xls); EIA,
Short Term Energy Outlook, Jan 2014; Hubbert (1965); BP Endergy Outlook 2035
History of the Peak Oil Theory
The term “peak oil” was coined by M. King Hubbert, a geophysicist with
Shell in the forties and fifties. At the time, the United States was the
largest producer of oil in the world. But in 1956 Hubbert predicted that
American oil dominance would peak fourteen years into the future.
Though he was considered a serious crank by some contemporaries,
just about everyone now knows that Hubbert was right. American crude
production has been in decline since 1970, resulting in our current
reliance on—some might say addiction to—foreign oil. His “Hubbert
Curve” is used by many Peak Oil theorists as a predictive tool for global
oil supply. Hubbert’s model proposed that production of resources with
a finite supply could be expected. Hubbert contended, production ramps
up quickly and hits a peak at about which time about half the recoverable
oil has been extracted. As the oil becomes increasingly difficult and
costly to pump out, the field goes into decline. But because population
and the economy continue to grow, so do energy needs. Hubbert held
that his theory about an individual field was applicable to the continental
U.S. oil production and even the entire world, which he predicted would
peak around 2000. Others put the date further into the future. The most
optimistic peak oil supporters estimate that production will begin to
decline after 2037.
So far, the Hubbert Curve has provided a pretty good fit to US oil
production up until the 1970s. Then Alaska came along – opening up a
whole new province that Hubbert did not anticipate - and shifted the path;
but still the Hubbert Curve was able to track the US production profile
reasonably well.
Then, in 2009, the trend of declining US crude oil production reversed, and
since then US output has surged upwards until in 2013, production was
higher than any year since 1989.
3) The Oil Market is in a state of confusion
The oil market is in a state of confusion, though several developments
may serve to halt the momentum depending on their respective outcomes.
First, if the preliminary deal between Iran and the U.S. over Tehran’s
nuclear program is completed and sanctions are removed, Iran might be
allowed to begin exporting larger volumes of oil. Also, OPEC production
surged by 890,000 barrels in March, 2015 compared with February,
threatening to overwhelm the recent demand growth. Finally, the U.S.
Department of Energy, is currently projecting that U.S. oil production will
fall in the next six months, but will recover next winter and continue to
grow to new highs. Implied in this projection is that oil prices will rise
again. There is more to the peaking of oil production than simply U.S.
shale oil however. Middle Eastern production is currently down about 2.5
million b/d due to geopolitical problems in Libya, Syria, Yemen, Sudan,
and Iran. Only Iran seems to offer much hope of getting out of its sanction
problems in the near term, thereby possibly adding up to another 1 million
b/d to the world’s oil supply. Currently, even this seems problematic .
Is “Peak Oil” Finally Wrong?
One strong reason why some believe that peak oil is wrong -- is about
prices and technology. Tomorrow’s technology will be different in ways we
cannot predict. Technological change inevitably marches on. For the oil
industry this means that:
1. The ability to recover more from any given field steadily increases.
Recovery rates in known fields have probably doubled over the
decades.
2. The ability to discover new fields also steadily increases. A few
years ago, deep water production was called “unconventional” and a
very minor contributor to global oil supplies. Now it amounts to 6%
of the total; and
3. We learn how to extract oil from new sources. The shale revolution
in the US is a perfect example. After all, one can turn almost
anything containing carbon into “oil”. The desk at which I am writing
could be transformed this way – as long as someone is willing to
pay the (financial and environmental) price for it.
So for economists, If supplies get scarce, prices rise, and this incentivizes
new technologies, which in turn allow for better recovery rates, new
discoveries, and access to other producible resources.
At the same time, higher prices dampen demand – leaving open the
possibility that demand falls (i.e. demand “peaks”, not supply, to return
to that phrase) - a phenomenon which we are seeing in the OECD today,
where oil demand has been falling since 2005. The world is not static,
technology moves on and oil supply (or demand!) therefore should not be
treated as fixed – this encapsulates the wisdom behind the old adage that,
just as the stone age didn’t end for lack of stones, so the oil age will not
end for lack of oil.
4) Take Aways
When all the many factors bearing on the peaking of world oil production
are weighed together, it still is impossible to reach a conclusion just yet.
Depletion is a real issue. The race between new technologies and new
resources is a major challenge; it is getting harder to access and extract
oil and we are becoming more reliant on technological advances to meet
this challenge. It should be noted, however, that if U.S. oil production
declines significantly this year and prices remain relatively low, there is a
chance that the world has seen the all time high of oil production. It still
will be many years after the fact before the peak whenever it comes can
be confirmed for real.
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