Conventional Oil Production

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The United States is awash in shale oil. Iran, once OPEC’s second-largest producer, is slowly ramping up production. Oil consumption in the Western world has been flat since the 2008 financial crisis. The “peak oil” theory has pretty much vanished, along with The Oil Drum, the bible of peak oil believers. Rest in peace. Or turn in your grave – because the price of oil tell a different story. On the New York Mercantile Exchange, crude oil futures are up 13 percent over one year. Since 2009, they have climbed every year except 2012. In Europe, the Brent crude futures are flat for the year after rising three years in a row. Brent, the de facto global benchmark, trades at about $113 (U.S.) a barrel. West Texas Intermediate, the North American benchmark, is at $106. For the sake of argument, let’s say the world is valuing oil at $110. With the abundance of shale oil in the United States – hundreds of billions of barrels (in theory) – you would think the price would be less as the United States challenges Saudi Arabia for top producer status. While the oil forecasters were pumping out bearish calls, the market itself has stuck to its triple-digit price outlook. Oil buyers know that prices can’t go into gradual, long-term decline, or even stay flat, when the world’s conventional oil fields are in decline. Exotic production – shale deposits, oil sands, biofuels, natural gas liquids – are supposed to fill the gap. But this so-called unconventional production is expensive and probably insufficient to cover the drop off in cheap, conventional production. Prices will rise to the point that demand will have to level off or fall. The “peak oil” and “peak demand” theories are really opposite sides of the same coin. Shale Oil Exploration Richard Miller, the former BP geochemist turned independent oil consultant, delivered a sobering lecture at University College London that laid out the case for dwindling future oil supply. His talk was based on published data from the U.S. Energy Information Agency, the International Energy Agency, the International Monetary Fund and other official sources. The data leave no doubt that the inexpensive oil is vanishing quickly. Conventional oil production peaked in 2008 at about 70 million barrels a day and is slowly declining. Saudi Arabia pumps about 10 million barrels a day. The math says a new Saudi Arabia has to be found every three years to offset the conventional oil drop off. Good luck. That’s why the Russians, Canadians and Americans are so eager to lock up the Arctic. It’s hoped that the Arctic may contain vast new oil reserves. About one-quarter of conventional production comes from the 20 biggest fields and most of them are in decline, some precipitously. North Sea oil production peaked at 4.5-million barrels a day in 1999. This year’s production is forecast at between 1.2 million and 1.4 million barrels a day. The so-called Forties field, the North Sea’s biggest, has been losing 9 per cent a year for more than 20 years. Ditto two other North Sea biggies – Brent and Ninian. Great Britain shed its status as an energy powerhouse about a decade ago, when it became a net energy importer. Last year, Britain spent almost £22 billion ($38 billion) buying foreign oil, natural gas and coal. Repeat this phenomena all over the world, from Mexico to Indonesia. Indonesia’s oil production has been in steady decline since the mid-1990s, and the country has gone from oil exporter to importer, at which point it got kicked out of the Organization of Petroleum Exporting Countries. While new exploration and technologies will extend the life of some of the gasping old fields, the long-term downward trend is intact. Conventional fields are running out of steam just as world demand is starting to climb, which can only put upward pressure on prices. The International Energy Association (IEA) estimates that oil demand will rise by 1.2 million barrels a day in 2014, or 1.3 percent, to 92.4 million barrels. The increase is driven by increased economic activity in the developed world and ever-rising demand in China and in other countries in the developing world. China is willing to pay almost any price for oil because oil drives its growth more than it does in the West, where energy use is less intensive per unit of economic output. China has also developed a love affair with traffic jams. The number of cars and motorbikes in China increased twenty fold between 2000 and 2010. It is forecast to double again in the next 20 years. The oil shills, the tech geeks and most, but not all, oil companies would have you believe that non-conventional energy will fill the gap as the cheap, easy-to-pump oil heads gently into the night. It might, but at what price and cost to the environment? Or it might not at any price. Deep-sea production is monstrously expensive and risky, as BP found out when its Macondo well in the Gulf of Mexico blew up. The Alberta oil sands also spew out more carbon dioxide than conventional production. Most biofuels, such as U.S. corn-based ethanol, are taxpayer-subsidized economic horror shows with dubious environmental benefits. The peak oil crowd has thinned out, to be sure, but it won’t disappear. U.S. shale oil doesn’t mean oil is about to become cheap and plentiful. The fall off in conventional oil production is real, and scary.