In March 1998, two geoscientists by the names of Colin Campbell and Jean Laherrere wrote an article in Scientific American titled “The End of Cheap Oil” which explained that a peak in conventional (cheap) oil would occur within the next 10 years, leading to higher oil prices.  The general public in the USA pretty much ignored the statements of this article (at their peril, by buying SUV’s and Hummers in the early 2000s), but we can see now, looking back, that Colin and Jean were correct!  In April 2007, some oil company CEO’s even admitted that the age of cheap oil was over.  In this post I will delve into the economic costs of oil exploration and extraction in this new age of the oil industry (this post grows out of Points 1 and 4 of my first post).  I will not go into the social and environmental externalities of oil extraction, as there is enough there for hundreds of posts, and indeed entire books have been written about these externalities (e.g. Crude World by Peter Maas). 

Exploration and extraction of crude oil has come a long way technologically from the days when Edwin Drake drilled the first commercial oil well in 1859.  Today (2014), oil & gas companies use extremely sophisticated methods to explore for and extract crude oil from the Earth’s crust.  These technologies include the use of supercomputers to create 3-D and 4-D (3-D over time) seismic models of oil and gas reservoirs to optimize exploration of new fields and optimize exploration of the peripheries of old fields.  Extraction technologies include horizontal drilling and the notorious hydraulic fracturing method; which was developed in the 1940s (http://fracfocus.org/hydraulic-fracturing-how-it-works/history-hydraulic-fracturing). 

Now, with the incredible rate of technological development over the past 155 years, not to mention increasing economies of scale, one would think that it would be easier and cheaper to extract oil from the crust than it used to be.  However, this is obviously not the case, as the break-even price for developing shale (tight) oil wells ranges from $60 to $80 a barrel, not to mention the high costs facing deep-water oil wells and oil sands development (these are other examples of unconventional oil). 

This is sobering.  All of the incredible technological development in the oil industry has resulted in increasing oil prices over time, not decreasing.  Yes, the USA is definitely extracting a lot more oil than before the boom began in 2009, but this oil is expensive, a lot more expensive than the conventional oil produced at the previous peak of oil extraction in 1970. 

So why is the shale oil boom in the USA even occurring? If it is so expensive to drill for, couldn’t a company make more money by drilling conventional (i.e. cheap) oil? Well, yes, of course! The break-even price for Iraqi oil is only $20, as conventional oil is much more easy to produce than unconventional oil (think of the oil gusher scenes in the movie Their Will Be Blood).  So we have a problem.  The problem is that there aren’t really any large conventional reservoirs left in the USA to develop!  That’s why the shale oil boom is happening now.  Decline of conventional crude oil extraction caused world oil prices to rise making it attractive to drill in shale.  The hydraulic fracturing technology has been around since the 1940s, but back then there were more than enough conventional oil fields to develop so the process was not widely used until around 2003 (when oil prices started rising). 

Why do you think oil companies are trying to drill in the Artic or are drilling even deeper than the Macondo well (2010 BP Blowout) in the Gulf of Mexico?  Why deep-water oil off of Brazil and Africa?  Why oil sands?  It’s because oil prices are high and the discoveries of cheap oil reservoirs have declined.  There could be 5-8 trillion barrels of crude oil in the Earth’s crust, but at what cost and rate can we extract it, and how much of it is actually recoverable? We’ve already extracted around 1.2 trillion barrels of the easy stuff!  If it costs $75-100+/bbl to develop the remaining oil then economies will try to switch to a different energy source for transportation, and the world economy will probably struggle to grow in the process.  Which, interestingly, would be a good thing for controlling CO2 emissions. 

Evidence for High Costs and Difficulties

Here are some articles indicating the difficulties and high costs facing oil companies in their race to extract the remaining crude oil from the crust:

Many oil companies are finding it very difficult to even explore for oil in the basins of the Artic Ocean, let alone extract any of it:

http://oilprice.com/Energy/Energy-General/More-Oil-Companies-Abandoning-Arctic-Plans-Letting-Leases-Expire.html

The Kashagan oil field in the Caspian Sea off of Kazakhstan was the largest conventional oil field discovery in the past few decades (discovered in 2000).  Its development has been extremely problematic over the past 14 years:

http://www.cacianalyst.org/publications/analytical-articles/item/12981-kazakhstans-kashagan-oil-fields-faces-problems-and-soaring-costs.html

Brazil’s pre-salt oil field discoveries were hailed as game changers by the media in 2007/2008 and yet 6 years later it is still hard to get oil out of them, though, very recently (summer 2014) the development of these fields maybe turning a corner; albeit at a very high cost:

http://www.washingtonpost.com/world/brazils-oil-euphoria-hits-reality-hard/2014/01/05/0d213790-4d4b-11e3-bf60-c1ca136ae14a_story.html

Shell pulled out of oil shale (Note: different from shale oil) research and development last year after 31 years trying to figure out how to make the economics work; if they can’t do it at $100/bbl, what price do they need?:

http://fuelfix.com/blog/2013/09/25/shell-pulls-out-of-oil-shale-project-leaving-1-big-operator-behind/

Last but not least, Saudi Arabia, the king of conventional, cheap oil is now looking for oil and gas fields in the Red Sea:

https://www.hgs.org/civicrm/event/info?id=1321&reset=1

Saudi Arabia has (supposedly) 268 billion barrels of reserves (virtually all conventional oil, cheap to produce) but they are now looking into the deep-water regions of the Red Sea for expensive-to-produce oil?  That should be concerning, as maybe their supergiant conventional fields (e.g. Ghawar) are finally starting to show some wear. 

Conclusions

Even the oil majors (IOC’s) admit that the easy oil is gone, yet they deny Peak Oil extraction will occur anytime soon.  As such, they are presumably betting that the world economy is willing to pay $100-$150+ per barrel for the next few decades.  That may not be the case as people are trying as hard as they can to give up fuel-intensive cars and trucks and looking for alternatives (electric cars, hybrids, public transportation, etc).  In addition, global economic growth maybe hindered by triple-digit oil prices for the foreseeable future, thereby impacting demand for oil.

It seems to me (and to a lot of “experts”) that oil companies the world over are stuck between developing increasingly expensive oil and dealing with a world economy that is ready to shift to a different transportation fuel or method as soon as it becomes widely available (maybe cheap, driverless, electric cars?).  All in all, the world oil companies will probably have to at some point give up spending more and more money on extracting expensive, unconventional oil and just become natural gas companies (this may already be happening due to the cuts in capital spending that many IOC’s are currently making).

If we include social and environmental externalities in the costs of extracting oil, then oil is truly becoming very expensive as we try to tap unconventional reserves like shale oil and oil sands.  For unconventional oil there is just more social and environmental impact per barrel produced (e.g. CO2 emissions per barrel produced).  It will be interesting to see how long the world economy is willing to put up with these increasing economic, social, and environmental costs. 

In this post I will outline my major points and in subsequent posts go into more detail on each point, and point you in the direction of more information.  If you are new to the topic of Peak Oil, and want to understand the basics check out this webpage:

http://peak-oil.org/peak-oil/

For a much more in depth look check out this excellent book (you do not need a technical background):

Peeking at Peak Oil  By Kjell Aleklett

As an aside, I think it is more accurate to call the theory Peak Cheap Oil or Peak Conventional Oil.  We will never technically run out of oil.  The capacity of the world to extract 85+ million barrels a day at $100/barrel, however, will.

Point 1:

It is possible that it is becoming more difficult each year to extract (not produced, oil was “produced” millions of years ago) the oil demanded by the world economy.  Why are oil companies going after shale and into the Artic Ocean to find oil; aren’t there easier places to extract it?

There is no arguing against the fact that a huge tight oil boom is going on in the US, primarily in the Bakken in North Dakota, the Eagle Ford Shale in southern Texas, and to a lesser extent, the Permian Basin in western Texas.  Here, data from the Energy Information Administration (EIA) shows the dramatic increase, way on the right:

The media has been gushing about this boom for 4+ years, and it is in fact a very remarkable turnaround for US oil production (Peak Oil debunked!?); however, why are oil companies even going after these geologic formations?

These formations are composed of hydraulically “tight” rocks (e.g. shales) meaning they have low permeability (a low ability to transmit fluids like oil or water).  For the first 145 years of the oil industry the idea was to target rocks that had high permeability.  Why? Because it is much easier (i.e. less costly) to pump oil from high permeability rocks than low permeability rocks.  A lot of the high permeability reservoirs don’t even need to be fracked! Imagine that!  An oil reservoir just ready to be pumped!

So why would the industry even want to target the Bakken, with its low porosity and low permeability (http://en.wikipedia.org/wiki/Bakken_formation) in the first place…?

It is possible that most of the “good” reservoirs in the US, and possibly worldwide, have already been found and tapped. One of the major reasons the US oil & gas boom is even happening is because we ran out of good places to drill, and so prices shot up making it worthwhile to target these “tight” reservoirs of unconventional oil.  I’m pretty sure that these companies are not just drilling for this hard to reach oil to show off their horizontal drilling skills.  I will go in more detail on the “easy” oil point in a later post.

Point 2:

International Oil Company (IOC) spending has increased greatly over the past 10-15 years while production has not increased; this goes hand-in-hand with Point 1.

Steven Kopits, now of Princeton Energy Advisers, gives an excellent presentation on oil supply vs. oil demand forecasting here:

http://www.youtube.com/watch?v=dLCsMRr7hAg. I highly recommend watching the entire presentation.

At 40:00, he shows data indicating that as the IOCs (Exxon, Shell, etc.) have increased capital spending by hundreds of billions of dollars, while their production has actually decreased.  They are still financially successful companies however; I wonder how? (Hint: see Point 4).  Also, I should note that the oil & gas boom in the US was driven primarily by smaller independent companies; the IOCs were late to that game.

Recent articles also tell us of these issues facing the IOCs:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10957292/Fossil-industry-is-the-subprime-danger-of-this-cycle.html

http://www.platts.com/news-feature/2014/oil/western-oil-production/index

Point 3:

The US has probably passed peak per-capita oil demand, due partly to a surge in alternative energies and fuel efficiency gains, but some of the other reasons why are disconcerting.

In Steven Kopits presentation he presents some data on how some subgroups of people in the US are not driving as much as before the Great Recession. A lot of these people are young and unemployed, and so they have no need to commute (see 33:00 to 37:00).  That’s a bit depressing to me.  Again, there definitely are “positive” reasons (gains in efficiency) for this decline in per capita oil consumption (demand) in the US and Europe, but you have to take the positive reasons with the negative.

Point 4:

Oil prices are still high.

Back in 1998, the inflation-adjusted price for West Texas Intermediate (WTI) oil in 2014 dollars was slightly under $20 (http://www.macrotrends.net/1369/crude-oil-price-history-chart), and as of July 2014, the price was slightly above $100.  As you can see from the oil price chart in the link, inflation-adjusted oil prices have been pretty high for the past 10 years, not counting 6 months during the Great Recession!

In the past four years world oil prices have hovered around $90 to $110 a barrel, despite the oil & gas boom in the US, and increased production from Canadian oil sands.  It seems like demand for petroleum is still outpacing supply globally for geological, geopolitical, or other reasons.  On the other hand, the gas boom has decimated natural gas prices (here in North America), so if you heat your home with natural gas as opposed to heating oil, you should be happy!

Point 5:

Per-capita production of crude oil in the US is down from the high of 1970 and we are still importing a lot of oil.  An even bigger surprise is that per-capita production of crude oil worldwide has also declined from previous highs.

You never really see this point made in media stories about the oil boom, but the fact is that in 1970, when the US was pumping 9.6 million barrels a day of crude oil (not including natural gas liquids or biofuels), the population of the US was around 200 million people.  In 2014, we are pumping about 8.0 million barrels a day of crude oil, with a population of 316 million people.  So, in 1970 the US was producing 0.048 barrels/person/day and in 2014 the US is producing 0.025 barrels/person/day.  So today we are at 52% of the peak per-capita crude oil production in 1970.  Yes, granted, we are doing much better than where we were prior to the boom beginning in 2009, but we still have a long way to go to get back to the 1970 per-capita production peak. (The production data is from the EIA, and the population data from the US Census Bureau).

Worldwide, per capita crude oil production has also declined.  In 1980, the world was producing 59.5 million barrels of crude oil per day, with a population of around 4.5 billion people.  In 2013, the world was producing 76 million barrels of crude oil per day, with a population of around 7.0 billion people.  So, in 1980 the world was producing 0.013 barrels/person/day and in 2014, the world was only producing 0.011 barrels/person/day.  (The production data is from the EIA, and the population data from the US Census Bureau).

The calculation for the worldwide per capita production is somewhat misleading and I will go into that in a future post (I need production data from before 1980).  However, the implications of declining per-capita production are serious.  The developing countries use much less oil per capita then the US does, so as they develop they may find it harder to replicate US energy usage, simply because of declining worldwide per capita oil production. If lots of people in developing countries want to live in the suburbs and drive cars they need alternatives to crude oil ASAP! To be fair there may be lower per capita demand for oil now due to efficiency gains, but all in all, there is just less net crude oil available per person then there was a few decades ago.

OK, these are red flags to me, and these points make me think Peak Oil still may be a large societal problem. In an attempt to be balanced, I present to you some points by Michael Lynch on why Peak Oil Theory is wrong:

http://www.forbes.com/sites/michaellynch/2014/06/19/peak-oil-1-what-is-peak-oil/

http://www.forbes.com/sites/michaellynch/2014/06/25/peak-oil-2-the-true-believers/

http://www.forbes.com/sites/michaellynch/2014/06/27/peak-oil-3-has-production-peaked/

http://www.forbes.com/sites/michaellynch/2014/07/07/peak-oil-4-the-urban-legend-of-inadequate-discoveries/

It’s up to you to decide if this topic is something that should concern you; many people dismiss it even though their lifestyles are made possible by oil.  There are many books and scientific articles written on it.  If you like to analyze things yourself, the data on Peak Oil is out there on the internet, and it is definitely intriguing.  Don’t take my word for it, I implore you to look into it yourself.

The funny thing is, I am a geologist finishing up graduate school, but not once in any of my geoscience classes did any professor mention peak oil, much less discuss or debate it.  If geologists don’t discuss peak oil, then who does?  That made me realize that probably 99.5% of the general public probably does not have an even simple understanding of the topic, hence this post.

Limitations to My Interpretations:

IEA says oil production still growing:  The International Energy Agency (IEA) reports total world oil production as including crude oil, natural gas liquids, biofuels, and processing gains all in one.  Doing this, however, masks the difficulty that the world is having in keeping conventional crude oil production from declining, as the alternatives (which aren’t as energy dense as crude oil) grow.  See this article for more information on this:

http://www.resilience.org/stories/2014-04-13/did-crude-oil-production-actually-peak-in-2005

Current Technologies:   Yes, there are definitely technologies that exist right now that will gradually help out with the Peak Oil problem (Electric Vehicles, fuel cells, biofuels etc.) and I guess these will also help with the climate problem (as long as the EV’s are not powered by fossil fuel).   However, the roll-out of these technologies will probably be a transition taking decades; it already started in the mid-2000s.  Check out the “Do the Math” blog for commentaries on current technologies.

Technological Optimism:   A group of scientists and engineers in the next 5 years could possibly invent a new energy source that completely displaces oil from the economy in a matter of 10 years, truly making Peak Oil a worthless thing to worry about.  Yeah, that might happen, but would you bet your savings on that event occurring?  In my opinion I think it is better to be a little pessimistic and outline a backup plan (many people have developed these already, like the “Hirsch Report”) as opposed to hoping some majestic idea will come along and save us.  That way you can be prepared.

Conclusions:

While these points show that Peak Oil may cause more economic hardship in the coming years, this does not mean that I think that the world economy is going to collapse.  What I think will happen is that the transition to a new energy economy will not be easy as we attempt to fill our land with solar panels, wind turbines, and biofuels.  I think that it will be a rough and bumpy journey with much hardship falling on the lower and middle classes, who spend a high percentage of their income on electricity, transportation fuel, heating, food etc.  Just take a look at what happened to the middle class of the US over at the past 6 years (Not to mention the economies of the Mediterranean countries! Yikes!!!).  I think it might be like this for the next few decades at least, a large recession every decade followed by a slow recovery (i.e. just a lower rate of worldwide economic growth, in general).

That might seem depressing but in the past 6 years a lot of people, regardless of income level, did a lot of happy things despite the economic downturn and slow recovery, and GDP doesn’t really measure happiness.

More posts to come looking at each of the points in more detail!  I have to finish writing my master’s thesis though, so it may take a while before a new post appears from me, so here’s some more info on Peak oil:

http://physics.ucsd.edu/do-the-math/2011/11/peak-oil-perspective/

Also, be sure to check out our list of links to other energy/environmental blogs and of course, my brother’s posts!