Contributed by Oilman2 –
“First, I agree (in broad terms) with M King Hubbert. The facts are that US production peaked about 1971 and World Oil Production peaked in 2005 or 2008 (depends on what “oil” is defined as – damned government agencies….). Hubbert used a simple graph and did not address oil price or economics, yet even today, his curve fits much more often than it does not, even in small individual oil fields across our planet.
I am IN the drilling business, and I am 3rd generation oilfield. I know this business, the crookedness inherent in any endeavor where land and big money are involved. I know that figures can lie and that liars always figure. I find it very interesting that if one does a Google search for “world oil production by year” that there is no graph that comes back showing the real curve from 1930 or 1940 to today. Yet we can find all sorts of curves going back a decade or so. The magnitude of oil scares politicians and bankers, and its declining abundance will change our world.
First. Let me say that Hubbert’s curve is not accurate, but that inaccuracy is because he was trying to stay within what he knew to be facts. Fact is, a predicting oil price is a bitch, more so today than ever before in history. Today’s prices are manipulated by governments and traders and brokers and oil company executives for their own benefit. This has always been so to a degree, but today the manipulation is so aggressive that even the traders are confounded. Computer algirithms and instant data flying across our globe make manipulation really easy if you have a couple billion dollars. Hubbert knew this manipulation occurred when he thought about writing his paper and when he spoke to congress – he could vouch for HIS numbers, but if he let pricing into his equations, then veracity would be taking a trip out the window. So he did not address the effects of oil price to keep it simple and unequivocal, a proper way to address politicians. He only spoke of oil volume. In hindsight, this is especially fortunate, as it gives a clear picture without clouding the issue with trading, currencies and computer manipulations.
Let me address price in a bare bones fashion:
If we have a zone or reservoir of offshore oil, let’s assume the geologists estimate (it has to be an estimate until we drill into it and see what we have) that it contains 400,000 barrels of oil. We mobilize and rent a drilling rig, and drill into the reservoir, and find oil. Right out of the box, we have spent roughly $7,000,000 to find this oil. Now the geologists must decide how much, so we do about $1,000,000 of testing, bringing our total to $8,000,000 million spent. The geologists now rework their estimate, and expect we have 240,000 barrels in the reservoir.
240,000 X $50/BBL = $12,000,000 minus drilling and testing costs of $8,000,000 = $4,000,000 oil available – eureka! We can make big money! But can we really?
Now we must put in production equipment and run a pipeline to an existing platform to get the oil to shore. The production equipment will be about $900,000 and the 4 mile pipeline laid under the water will be $1,200,000.
$4,000,000 – ($1,200,000 +$900,000) = $1,900,000
Great! We made money! But at $35/BBL, what happens? We only make $8,400,000 but the expense to find, produce and get it to shore is $10,100,000 – we just lost our asses. These are the things we weigh when drilling any well – and the reason that high oil prices make smaller pockets of oil economically viable.
The same economics apply to shale oil and shale gas, only the fracking costs more than drilling the well, and shipping via rail cars costs more then even shipping by trucks. So I am going to say this, and while you can put any spin on it you want, the numbers will prove me right – shale oil and gas require HUGE volumes to be economical even at HIGH prices ($90/BBL). Take either the volume away or the high prices, and you lose your ass because the cost to drill and complete each one is 2-3 times normal.
To put it as simply as possible: with costs being relatively fixed within the industry, an oil company needs high oil prices to make smaller pockets of oil economical or to use expensive drilling and completion methods; alternatively, low oil prices require a severe drop in industry costs combined with larger potential pockets of oil. 99% of the really large oilfields have been discovered or are depleting today – hence what is required to look for and get additional reserves is higher prices.
Additionally, fracking produces wells with much shorter lifespans than traditional vertical or horizontal wells – there isn’t any secondary or tertiary production magic to be worked, as in conventional wells. When production drops, it is over. That is why the drilling is like a hamster in a wheel – you either pedal, drilling well after well or you are dead. Without prices of near $90/BBL, much of the shale oil in the US isn’t economical to pursue. Much of the smaller conventional deposits are uneconomical and get tossed into the wastecan too. Deepwater prospects that do not have huge potential or that have very high costs also get pushed back or shelved outright without $90/BBL prices
How does this relate to Hubbert’s Curve? Well, it (high oil prices) changes the shape of the backside of the curve – it flattens it out and extends the depletion time he used in his model. At $90/BBL, we can do things we cannot do at $50/BBL and still make money. The problem is that the rest of the world cannot really afford much over $90/BBL – and governments know this.
What made the fracking boom possible besides oil prices? Well, two things: cheap money to borrow under the Federal Reserves QE program and low interest rates in every other venue for investors. If banks pay $2% and bonds pay you $3%, everybody invests in unconventional oil because they pay $5-6%. Brokers put deals together to buy enormous land land tracts in these shale plays, banking on the “forward looking statements” proffered by nascent oil companies and expanding independents. Everybody assumed oil would be $90/BBL or better, even though they all (to a man) denied the existence of Peak Oil.
The Saudi Arabian decision was not made in a vacuum – the royal family and government are in communication with the US government, especially in matters regarding oil security, They buy more arms from the US than they can operate effectively, and these are NOT simple guns but aircraft and missle defense systems. I am sure in my gut that the US government tacitly sanctioned the KSA decision to drop oil prices, likely to further the Neocon attempt to cripple Russia. Hurting “Big Oil” that caused the Macondo disaster makes many Americans think, “Hell yes, the reckless, polluting bastards”. The reality is that the only appreciable economic growth in this country has been in the oil patch, and it was due to fracking and unconventional oil.
I believe that oil prices, without hot QE money propping up US production efforts, will descend to something like 2006 or 2007 prices, around $60/BBL. However, to get there, the US shale boom has to end and the production numbers drop back to conventional oil levels. This will take time, as every company producing shale oil has debts to pay, and they cannot service these debts without selling oil. I am sure M&A departments are working overtime, and oilfield companies will be restructured. It is a great opportunity for banks and investment houses to get positioned for the next run-up in oil prices. When everybody is distressed, everybody is an M&A target. Do you really think that the announcement of the Baker-Hughes/Halliburton deal was a coincidence in timing? I do not, because their CEO’s run the same glad-handing circuit as high-level agency bureaucrats and senators.
This is manipulation at it’s finest – an entire booming industry shut down by colluding governments for reasons both economical and imperial. Was the shale boom anticipated? Yes – the KSA (Kingdom of Saudi Arabia) had imagined this years ago, when oil production spiked here in the US from horizontal drilling. Further, the KSA is currently water flooding Ghawar, which means their largest oil field is in depletion, the largest field in the world. In reality, this means that the KSA cannot appreciably increase production – their ability as a swing producer can no longer keep up with demand. Killing off the shale oil industry by dropping prices is temporary, but required. It also produces a future oil price spike when US production drops after numerous restructuring and bankruptcies. It turns investors away from the US oil market and technologies – it keeps the world running “as usual”.
KSA as a desert country (golf courses have been made of sand there, btw…), has no other product to sell. Without oil, tribalism ensues and the country cannot support their current population with water or food. The only country that is lumped into the Middle East that is not truly a desert is Iran – the remainder have excessive populations for their land area and carrying capacities – without exporting oil, these countries are in revolt or busy with severe internal affairs.
We have been set up for a future price jolt – and this may be planned to coincide with other things, such as the default on US debt or bank failures. A scapegoat is required, and KSA is used to being a villain. I believe that this is the second big economic shock from oil prices. The first was 2007 price jump to over $100/BBL – when the US bailed out the TBTF banks and other such nonsense. High oil prices were killing economies and filtering into every section of the world economy. This current price drop sets us up for a future shock when demand exceeds supply and industry has downsized and cannot respond.
These shocks were predicted as part of “demand destruction” caused by high oil prices. Price volatility is what causes demand destruction – up and down swings caused by unforeseen factors as the amount of oil and the price bounce up and down. Businesses stretched too thin fail, whether it is Wally Mart or Zydeco Oil & Gas – high prices hurt general economies, and lowering prices kills oil technology, oil investment and reduces availability of oil, as we showed in our earlier math lesson.
Governments now know that economies cannot grow when oil prices exceed $100/BBL – the cost of traditional commerce becomes too high. The US might have withstood this, but offshoring or jobs has hollowed our economy into frailty. ‘Truck Driver’ being the most common job in the US speaks volumes – we are a ‘service economy’ and we import everything from cheaper labor zones on the back of cheap oil. High oil price has also raised both expectations and living standards in other countries, making them more sensitive to oil prices. Yet without growth, the debt monster (world debt being ONE QUADRILLION US dollars) will come knocking. So how can growth, that the current economic system requires, happen with oil prices over $100/BBL? The short answer is that it cannot, at least as it is defined today.
There is a giant push at this time by the ultra-rich for a global government, with the UN, IMF, World Bank and many corporations, banks and fat cats wanting globalism to continue. All we need to do to see the folly in this is to realize that in 100 years we burned through 100% of the cheap oil on the planet, and in the last 25 we have burned through a lot of the moderately expensive oil. Those not actually in my business deny Peak Oil or predict amazing future tech will make everything ok. The real fact is that M. King Hubbert worked for Shell and was sanctioned by Shell; ExxonMobil has NEVER denied Peak Oil, nor has BP or Petrobras or any other big oil company. They may push it into the future to the best of their public relations abiities – but denial is foolish after Hubbert let tha cat out of the bag.
Globalism will continue until the economic uncertainties of oil prices and deliveries cripple it. At that time, globalism will die a slow death, if it does not become infected with some other ailment. Globalism, the ability to walk into Wally Mart and buy cheap crap from other countries, will be gone. Looking back in time, it used to cost a lot for “foreign goods” – their price reflected the expense of shipping across oceans. French perfume was considered very expensive – now it is an old saying that makes no sense to my children. Today, cars are made from parts manufactured across several continents – because both shipping and wages are cheap. But wages cannot remain cheap if oil prices exceed $100/BBL – workers with low wages cannot afford to drive a crappy car and public transport becomes expensive. Air conditioning and heating and electricity eat up their small paychecks. This is why globalists chase low wages – their cheap manufacturing target tends to move as the people earn more, learn more and raise their living standards.
Globalism is only possible with oil as a very cheap commodity. At $120/BBL, oil is 2 cents an ounce and gasoline 3 cents. Relative to other things we are used to thinking about, this sounds incredibly cheap. Yet this price cripples the world economy. Why? Because oil is in absolutely everything related to commerce and to production of anything. The current world does not exist without cheap oil, because it underlies every single aspect of modern life, especially transport.
To put this into my generations’ perspective: the Arab oil embargo doubled the price of gasoline from 26 cents to 50 cents – sending the US into a recession. At 26 cents a gallon, gasoline was .002 cents per ounce; at 50 cents a gallon, it was .004 cents per gallon. At $100/BBL, today’s (ok, YESTERDAYS) gasoline was .024 dollars or 2 cents per ounce. At $60/BBL, gasoline is .017 per ounce – meaning globalism struggles economically if prices approach 3 cents an ounce for gasoline.
So where is the future for oil? Well, not good if it exceeds 3 cents an ounce – that destroys globalism and large economies. It’s not good either if it falls below $100/BBL – the smaller oil deposits aren’t economical at that price, and fracking and many other prospects lose their luster – the oil industry cannot afford lower oil prices because it costs too much to get it out of the ground in the remaining smaller quantities scattered all over the planet. Remember – we need a lot of volume or high prices to even get excited about drilling a well. The big, easy ones have all been found and are depleting already. So low oil prices force those wishing to turn a buck away from oil investment – because there just isn’t much cheap stuff left in the ground.
My crystal ball indicates that we are looking at a saw tooth future for both economies and oil prices. Prices go up, things get creaky and businesses fail, then prices go down and oil companies go broke or sell out. At some point it makes no sense to take the huge risk of finding oil for a very marginal return, at best. When we get to that point, wholesale exit from the oil industry ensues for every company that is not nationalized (as an anecdote, I know of over 10 privately held companies that have simply sold out because it was too risky and expensive to play anymore – in the last 3 years). We are looking at whatever Agenda 21 or NWO global governance is, being stillborn – at best they get 50 years or so, then shipping things across the planet, along with air travel, become things only the rich can afford. And if only the rich can afford it, you cannot base a global economy or global gevernment on a few hundred thousand fat cats.
Many will decry this and call me stupid or employ various ways of throwing rocks at the messenger. But I am an INSIDER – this has been my career and I have been all over the world drilling for oil. This is what I think we are in for. I have been to the KSA multiple times and walked alongside empty pipelines that were hot and full of oil in my youth. I have watched my industry innovate over and over, delivering new technologies to get at oil. My industry makes mobile structures that are clearly visible from space – not even the US Navy does that. And over the last 25 years I have watched as oilfield after oilfield hit peak, and then we are asked to deliver new technology to eke out every drop we possiby can – and that pays big bucks to a few of us. Oil depletion is real, rapid and global in nature – but seldom talked about, as it is a business negative and requires changes to lifestyles and future expectations.
Oil is also why I am not getting involved in the whole AGW madness – we only have several decades of oil left to burn at the prodigious rates we consume it – 200 years is not visible in the geologic record, and that is the outside estimate of world oil reserves. We are beyond the halfway point in consuming it – so whatever changes it has wrought to the environment will cease in my children’s or grandchildren’s lifetime. Whatever changes we have incurred to the globe from burning fossil fuels is destined to decline and the results are already baked in. The horse is out of the barn – taxing the farmer isn’t going to get the horse back in the barn, but it sure can make a few folks richer.
I am just hoping that in sliding down the back of the Peak Oil curve, we do not plunge into nuclear war or complete barbarism across our planet. If we can somehow soften the blow that running out of cheap oil deals us, then our kids and grandkids can make a go of things. But their world will not be the same as ours – it cannot be when you simply look at the numbers inherent in our oil-based economy. The saddest thing is that this has been common knowledge for every government on our planet – and only Iceland and Japan seem to have even considered it.
As a “new rural pioneer” – what does this mean to me?
First, if I have no offspring, then I need not worry about anything except what I want anyway, so it only impacts me if I cannot afford to drive or tractor or buy electricity. What? Well, yes – without cheap oil, businesses shut down, economies cease to grow and things become scarcer and more expensive across the board. So even if it is just little old me and a significant other, “stuff” will get more expensive and scarce – more so if the US dollar becomes unhitched from oil purchases. So that should get factored in.
If I have offspring, their lives will be severely impacted as we slide down the backside of Peak Oil. As an immediate example: son owns a 7.3L F-250 turbo diesel truck – a pulling monster. Got it for use at the farm hauling stuff to build and it is perfect for that. On his current income, he cannot afford to commute in it due to diesel prices and MPG. So he is looking at a beater 4-cylinder POS that gets good MPG strictly to get to work or the store in town. Already, with gas prices swinging upwards with the occasional correction, things he decided on a few years back no longer make economic sense. Adjustments must be made, and these require additional capital expense.
My plan is to depart this plane of existence and leave both knowledge and a chunk of land to my kids. Sure, there are other things but my bucket list is super short. I have done and seen more than 99% of people due to travelling the world in the oil business. My long-term goal is to try and devise a low energy input farm that can work without much oil input, and yet without slavery or excessive backbreaking labor.
I wrote this so people could understand that the impacts of global oil depletion are simply inescapable. Oil is in EVERYTHING we own or do when you dig deeply enough. So when oil reaches 4 cents an ounce, the world will be forced to change dramatically. The primary impact will be transportation, and things will get very expensive. Due to that, I am recommending you buy non-food things you will need or your kids will need in the future, when “going to town” becomes an event that must be planned due to costs.
I think anything and everything should be imagined with an oil price of $150/BBL or more – otherwise your visions will be inadequate. Electricity costs should be doubled in your planning, even if your local supplier burns coal. Things you buy should be designed to last and be reusable – throwaway lifestyle needs to go bye-bye if you are trying to envision the future with higher oil prices. Things like electric can openers and juicers are just not where money ought to go. Plastic things need to get replaced by metallic things. If you buy it, you should buy something that can be repaired, as buying “a new one” may be hugely expensive or nigh on impossible in 20 years.
This is unlikely to happen all at once, but bear in mind that when my career in the oil patch started, gasoline was 50 cents a gallon and it altered world economics. Today, it has been at $3-4 a gallon, and yet we are led to believe that all is well and this is both normal and expected. There are simply things that huge corporations and governments do not want to imagine and they do not want us thinking about them. Global oil depletion is the elephant in the room, and several bits of furniture have been destroyed at this point in time.
There are many more things to discuss, many specifics, but for now try to wrap your mind around the fact that your grandchildren are likely to see a very different world and live in a very different society. And it is unlikely to be the Star Trek version of society…
More to come
As you may expect, Oilman2 and I share many of the same views: In order to live happily ever after, it helps to be free and out from all indentures. Having preferentially lower taxes producing agricultural land is one of the few ways people can “vote with their feet” since the preferred part (*None of the Above) doesn’t appear on the ballot. Only the two corporate-run parties.
America’s still a great idea, it’s just that it has been hijacked and is now the Checkbook Republic.