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Rising oil prices were seen last year as a positive result of growing global growth and recovery, but a combination of factors is turning this benign view into a more sinister scenario.

On the supply side, the combined efforts of OPEC and Russia, leaky as the agreement has been, have managed to reduce the global oil surplus in just 18 months to bring the market largely into balance. As a result, oil prices have gradually risen during the period. It’s a trend most observers have been sanguine about, believing the U.S.’s tight oil producers, encouraged by rising prices, will increase output to ensure ample supply and keep a lid on oil prices getting ahead of themselves.

(Click to enlarge)

But that benign view had not taken account of President Trump’s decision to rip up the Iran nuclear deal and, as a result, to reinstate sanctions, a move that will take place in two phases to give firms time to adjust.

According to The Telegraph, this will be done in two stages, on Aug. 6 and Nov. 4, allowing 90- and 180-day wind-down periods. In addition, the Treasury is to re-list Iranian individuals and entities in the Specially Designated Nationals (SDN) list, thus revoking special licenses and exceptions previously granted to individuals and companies to deal with Iran, making it all but impossible for firms with a U.S. presence or needing dollar clearing to deal with them.

Lastly, Iran’s crude oil sales will be limited under the National Defense Authorization Act of 2012, as the U.S. departments of State, Energy and Treasury will allow ongoing but reduced purchases of oil from Iran, termed “significant reduction exceptions” on a country-by-country basis if they demonstrate a commitment to substantially decrease oil purchases (usually at least a 20 percent reduction).

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New U.S. Record-Level Oil Production! Peak Oil Theory Disproven! Not.

March 6, 2018

New U.S. Record-Level Oil Production! Peak Oil Theory Disproven! Not.

Well, I’m amazed and impressed. Tight oil production has pushed total United States petroleum output to more than 10 million barrels a day, a rate last seen almost a half-century ago. It’s a new U.S. record. Fifteen years ago I was traveling the world with a Powerpoint presentation featuring a graph of U.S. oil production history. That graph showed a clear peak in 1970 and a long bumpy decline thereafter.

My message: as went the U.S., so would go the world at some point in the fairly near future. Peak oil—the inevitable moment when global oil supplies started drying up—would be a watershed for industrial societies, leading to economic contraction, geopolitical crisis, and social upheaval.

So is it time for a retraction? The optics are certainly unfavorable for peak oil theorists like me. Our forecasts obviously failed, in that none of us expected the current surge in U.S. output. But permit me to offer some context.

Everyone agrees that the surge is almost entirely due to tight oil (globally, there has also been growth in bitumen from Canada, deepwater oil, and other unconventional sources). The application of hydrofracturing and horizontal drilling to low-permeability source rocks in the United States represents an amazing success story for the oil industry—at least in terms of raw petroleum output. But what conditions led to this bonanza?

Return with me now to those thrilling days of yesteryear—the year 2005, to be precise. That’s when the rate of world conventional oil production stopped growing and hit a plateau that continues to this day. Oil prices were already scrambling upward; by mid-2008 they had zoomed to nearly $150 per barrel. And it was at that moment that the global financial crisis erupted. Which was, by most accounts, a survival threat to industrial society.

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EIA’s Shocking U.S. Oil Production Predictions

March 1, 2018

EIA’s Shocking U.S. Oil Production Predictions

Between 2010 and 2015, annual oil production in the U.S. grew by four million barrels per day (BPD). Production dipped in 2016, but then U.S. crude oil production again rose by 1.2 million BPD between January and December 2017, to levels that haven’t been seen since the early 1970s.

The surge in production is a result of growth in tight oil (more commonly known as shale oil). Many, including myself, never imagined that oil production could grow enough to threaten the U.S. oil production peak from 1970. But that looks inevitable at this point.

This production increase raises the question: Just how much will U.S. tight oil production increase before it peaks and begins to decline? Another million BPD? Three million BPD?

The Energy Information Administration’s latest Annual Energy Outlook (with projections to 2050) attempts to answer this question, modeling several scenarios for future oil production.

The Reference case projection assumes that known technologies continue to improve along recent trend lines. The economic and demographic trends that were used reflect the current views of leading forecasters.

In the High Oil and Gas Resource and Technology case, lower costs and a higher resource availability than in the Reference case are assumed. In the Low Oil and Gas Resource and Technology case, the assumption is of lower resources and higher costs.

Here are the EIA’s projections:

(Click to enlarge)

U.S. oil production projections.

Every case assumes at least a few more years of tight oil supply growth. The Reference case shows shale/tight oil production growth of two to three million BPD over the next three years, before leveling off and remaining at approximately that level until 2050.

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US Rig Count Soars Most In 10 Months As Production Hits Record High

January 26, 2018

US Rig Count Soars Most In 10 Months As Production Hits Record High

US rig counts rose by 12 in the last week – the biggest rise since March 2017 – as the lagged crude price is sparking more drilling and in turn sending production surging to a new record high… just shy of Saudi Arabia!

US crude production surged back from its weather-impacted plunge to a new record high last week…

And is set to overtake Saudi Arabia very soon…

Why The U.S. Can’t Be Called A ‘Swing Producer’

January 7, 2016

Why The U.S. Can’t Be Called A ‘Swing Producer’

They are wrong. It is preposterous to say that the world’s largest oil importer is also its swing producer.

There are two types of oil producers in the world: those who have the will and the means to affect market prices, and those who react to them. In other words, the swing producer and everyone else.

A swing producer must meet the following criteria:

• A swing producer must be a net exporter of oil.

• A swing producer must have enough daily production, spare capacity and reserves to influence market prices by balancing supply and demand through increasing or decreasing output.

• A swing producer must be able to act authoritatively and quickly to increase or decrease output.

• In the real world, a swing producer is a euphemism for a cartel. No single producer has enough oil leverage to balance the market and influence prices by itself. That includes Saudi Arabia, Russia, and the United States, the top 3 producers in the world. Obviously, it also includes U.S. tight oil.

• A swing producer must have low production costs and have the financial reserves to withstand reduced cash flow when restricting or increasing supply is necessary to balance the market.

So, let’s go down the list for OPEC and U.S. tight oil.

OPEC’s net exports for 2014 were 23 million barrels per day (mmbpd) (Figure 1). U.S. net exports were -7 mmbpd. In other words, the U.S. is a net importer of crude oil. A net importer of oil cannot be a swing producer.

Figure 1. OPEC and U.S. 2014 net crude oil exports.
Source: OPEC & Labyrinth Consulting Services, Inc.

(Click image to enlarge)

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U.S. tight oil production decline

September 1, 2015

U.S. tight oil production decline

U.S. oil production has begun to drop in response to low oil prices, but not as dramatically as many had anticipated.

Oil companies have cut back spending significantly in response to the fall in the price of oil. The number of rigs that are active in the main U.S. tight oil producing regions– the Permian and Eagle Ford in Texas, Bakken in North Dakota and Montana, and Niobrara in Wyoming and Colorado– is down 58% over the last 12 months.

Nevertheless, U.S. tight oil production continued to climb through April. It has fallen since, but the EIA estimates that September production will only be down 7%, or about 360,000 barrels/day, from the peak in April.

This is despite the fact that typically output from an existing well falls very quickly after it begins production. The EIA estimates that tight oil production from wells that have been in operation for 3 months or more has declined by 1.6 mb/d since April, as calculated by the sum of the EIA estimated monthly declines in legacy production from May to September.

One would think that these decline rates from existing wells and the drop in the number of rigs drilling new wells would mean that production would have fallen much more dramatically. Why didn’t it? The answer is that there has been a phenomenal increase in productivity per rig. For example, the EIA estimates that operating a rig for a month in the Bakken would have led to a gross production increase of 388 barrels/day two years ago but can add 692 barrels today.

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Shale Gas Reality Check

July 28, 2015

Shale Gas Reality Check

In October 2014, Post Carbon Institute published the results of what likely remains the most thorough independent analysis of U.S. shale gas and tight oil production ever conducted. The process of drilling for shale gas and tight oil is known colloquially as “fracking” and has drawn a great deal of controversy—considered by some as an energy revolution and others as an environmental and human health catastrophe.

Much of the cost-benefit debate over fracking has come down to the perception of just how much domestic oil and gas it can produce and at what cost. To answer this question, policymakers, the media, and the general public have typically turned to the U.S. Department of Energy’s Energy Information Administration (EIA), which every year publishes its Annual Energy Outlook (AEO).

In Drilling Deeper, PCI Fellow David Hughes took a hard look at the EIA’s AEO2014 and found that its projections for future production and prices suffered from a worrisome level of optimism. This lead us and others to raise important questions about the wisdom of some energy policies and infrastructure projects (for example, the approval of Liquified Natural Gas export terminals and the lifting of the crude oil export ban) that have been pursued largely on the basis of the EIA’s rosy forecasts.

Recently, the EIA released its Annual Energy Outlook 2015 and so we asked David Hughes to see how the EIA’s projections and assumptions have changed over the last year, and to assess the AEO2015 against both Drilling Deeperand up-to-date production data from key shale gas and tight oil plays. What follows are Hughes’s findings regarding shale gas. The AEO2015’s tight oil projections will be reviewed in early September 2015.

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Oil wars: Shifting balance of power?

March 11, 2015

Oil wars: Shifting balance of power?

What impact are lower global oil prices having on the world’s geopolitical landscape?

Global oil policies are becoming ever more complex as suppliers balance their needs, priorities and self-interests.

A period of low prices is redefining the geopolitical landscape, and bringing international relations into sharp focus.

The price of crude oil has tumbled since June, down by almost 50 percent from $115 a barrel to a little below $60 a barrel.

Lower energy costs are being driven by weakening demand, a reluctance by OPEC to cut production, and the rise of the US as the world’s largest oil producer.

The emerging price wars are set against a backdrop of multiple conflicts and crises in oil producing nations.

So how will these changing dynamics affect the way states deal with each other?

Does OPEC still have the upper hand? And how is surging production in the US playing into a potentially volatile mix?

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Oil Prices Don’t Change Because of Rig Count

March 2, 2015

Oil Prices Don’t Change Because of Rig Count

Oil prices don’t change based on weekly rig count reports.

Yet every week, there are proclamations by analysts that oil prices are poised to recover because of some change in the Baker Hughes North American rig count. Others state that U.S. tight oil production will continue to rise despite falling rig counts because of the miracle of shale rig efficiency.

What this really means is that nobody has any idea about when oil prices will rebound. As I have previously written, that is because nothing has happened so far to cause a change in oil prices.

What can we learn from rig counts? The weekly U.S. rig count is another data point that, along with other data points, can help us to see potential trends while we wait for something meaningful to happen that causes oil prices to rise…or to fall farther. But we have to do some work with the data before we can hope to get anything from the rig count and, even then, we must not read too much into it.

First, the total North American or U.S. rig count is a practically meaningless number. Rig counts rise and fall all the time whether prices are rising or falling. In the chart below, the rig count shown in red changed weekly whether oil prices were rising or falling.

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What is Saudi Arabia not telling us about its oil future?

February 23, 2015

What is Saudi Arabia not telling us about its oil future?

It is popular these days to speculate about why Saudi Arabia cajoled its OPEC allies into maintaining oil production in the face of flagging world demand. As the price the world pays for oil and oil products has plummeted, the price OPEC members are paying in terms of lower revenues is high, even unbearable for those who didn’t save up for just such a rainy day.

Was the real reason for the decision to maintain production the desire to undermine rising U.S. tight oil production–which has now proven embarrassingly vulnerable to low prices after years of triumphalist talk from the industry about America’s “energy renaissance”? Were the Saudis also thinking of crippling Canada’s high-cost tar sands production? Was it Sunni Saudi Arabia’s wish to undermine its chief adversary in the region, Shiite Iran? Was the Saudi kingdom doing Washington’s bidding by weakening Russia, a country that relies so heavily on its oil export revenue?

The Saudis say explicitly that they believe non-OPEC producers must now balance world oil supply by cutting back production rather than relying on OPEC–meaning mostly Saudi Arabia–to do so. And, those cutbacks in the form of drastically reduced investment are already taking place in the United States, Canada and around the world as low prices are forcing drillers to scale back their drilling plans dramatically. It is not well understood, however, that almost all of the growth in world oil production since 2005 has come from high-cost deposits in the United States and Canada which has made the two countries easy and tempting targets for the Saudis’ low-price strategy.

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Tight oil boom can explain only part of drop in US oil product imports

January 13, 2015

Tight oil boom can explain only part of drop in US oil product imports

We continue to look at what impact US tight oil has on global oil markets, in this post the reduction of US petroleum product imports. This analysis shows that only around one quarter of a drop of 1.7 mb/d since 2005/06 can be explained by the tight oil boom.

Fig 1: US product imports

The graph shows that US product imports peaked already in 2005/06, long before the tight oil boom started. The drop between that peak and 2010 was around 1 mb/d. Remember that the US went into recession end 2007. A further drop of 700 kb/d happened during the tight oil boom.

(1) US product imports from Venezuela

The biggest drop came from Venezuela and Virgin Islands.

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World on drip of unconventional oil

December 13, 2014

World on drip of unconventional oil.

Currently lower oil prices due to a combination of increasing oil supplies and subdued demand come at a high cost to the environment and the climate. Additional oil supplies are exclusively from fracking tight oil in the US and from Canadian tar sands.

Fig 1: Production of US tight oil, Canadian tar sands and rest-of-world crude

The graph shows that crude oil production outside the US and Canada is on a bumpy plateau since 2005. In fact, after 2011, rest-of-world crude production declined like in 2005-2007:

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(1) US product imports from Venezuela

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