The Oil Production Plateau

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I was at a talk recently where a well-known oil economist made an analogy.

He said that if you gathered up all the crude oil that people have ever pumped out of the ground since Col. Drake drilled his famous well in 1859, it would cover California to a depth of about 10 feet.

“Of course,” he said with a smile, “we don’t have to worry about California drowning under 10 feet of oil. Over the past 150 years, mankind has taken all that oil, burned it, harnessed the energy and put the combustion products into the atmosphere.”

Everyone in the room laughed… sort of. We got the thermodynamic point, which is that mankind uses a heck of a lot of oil, much of it via four-stroke engines and that well-known cycle: intake, compression, power and exhaust.

Why has mankind used so much oil? Because global population has risen for over a century, right along with oil use. “People are energy,” as Scott Tinker, the state geologist of Texas, says. And people like oil because it’s energy-dense. A little bit of oil goes a long way, if you use it right.

Of course, oil impacts the planet in many ways, good and not so good. Indeed, it’s fair to say that oil defines modernism, even modern civilization. Take away oil, and much else in our world goes away, starting with Big Government and its far-ranging military and police powers. Take away oil, and most of the world’s people go away, too, sooner or later.

Keep in mind that the world’s oil-dependent energy system has been a century and a half in the making. The world — as we know it — needs a constant oil fix, and that won’t change anytime soon. Not without a major dystopian catastrophe.

Flat Output

Enough introduction. Let’s look at some numbers. Every day, the world uses about 84 million barrels of crude oil. That oil, of course, comes out of the ground, from wells scattered pretty much everywhere.

Oil comes from the deserts of the Middle East, the frozen tundra of Russia and Alaska. Oil comes, in huge volumes, from platforms in the Gulf of Mexico and North Sea, and wells off Brazil and West Africa. And oil comes in dribs and drabs from stripper wells across the oil patches of America, Canada and many other locales. You get the idea.

These two graphs illustrate the sources and destinations of the world’s daily oil.

First, look at the production side graph. Note how overall global oil output has flattened out over the past five years or so. Is this the proverbial “Peak Oil” plateau, the maximum in global output that precedes a long-term decline?

Some people now hate hearing talk about Peak Oil. They won’t have a word of it. The so-called “fracking revolution” is supposed to solve our energy problems for a long time into the future. Between the Eagle Ford play, down in Texas, and the Bakken play, up in North Dakota, the U.S. is in tall cotton, energywise. Or so I’ve been told.

Indeed, lately, I’ve received snarky emails from some readers when I bring up Peak Oil. I’ve been accused of “living in 2005.” One reader asked if I knew that the U.S. “will surpass Saudi Arabia in oil output by 2020.” Well, yes. I received that memo. But there’s more to the story…

I’ve stated many times that the Peak Oil concept is a tool. It’s a lens through which one can observe the world of energy, both to figure out what’s happening now and to forecast possible future scenarios.

In simple terms we’re talking about natural depletion.  As we find more “fracking” oil and gas here in the U.S. many “conventional” forms of oil (domestically and globally) are naturally depleting – for example: Alaska’s North Slope, Mexico’s Cantarell field, and other, once-prolific production zone s like Siberia and Egypt.

Indeed, to say the current situation in Cairo has solely to do with natural oil depletion is NOT a far stretch of the imagination.

Going forward we’re going to need to produce a lot more oil to make up for this natural depletion. Here in the U.S. we’re actually seeing that happen — it’s that whole “drilling treadmill” idea that we covered last week.

Point is, as we find more domestic, unconventional energy we have to agree that the global oil production output — when accounting for natural depletion, — doesn’t jump off the charts.

Besides, when it comes to Peak Oil, time will tell. I started thinking about Peak Oil back in the 1970s when I met the geologist M. King Hubbert at Harvard. It’s only been 35 years. I can wait.

Can Consumption Exceed Production?

Let’s get back to those graphs. Look at the one for oil consumption. There’s no recent plateau there, right? Globally, oil demand has been steadily growing. It’s pretty clear that more and more oil is moving and burning across the world.

When you compare the two graphs, there appears to be higher oil “consumption” than there is “production.” How can that be? Can the world use more oil than it produces?

The difference in production and consumption between the graphs is due to two main things. First is the growing supply of natural gas liquids (NGLs) — essentially “oil” from gas deposits, such as blowing down traditional gas caps, as well as the recent fracking revolution. Basically, the world supplements its crude supply with NGLs.

That NGL phenomenon will work until it stops working due to the dicey economics of what’s called “energy return on investment” (EROI). That is, at some point, eventually, somebody will figure out that they’re putting a barrel of oil in to get a barrel of oil out.

Whoops! Busted! At the end of the day, you can’t violate the second law of thermodynamics for long. Physics will prevail.

The second aspect of crude oil consumption exceeding production is a quirk of modern technology called “refinery gains.” In essence, down at the refinery, there are ways of transforming a barrel of crude into more than a barrel of refined product.

Here’s a graph that’s based on data from BP. The data show that crude oil production has hit a plateau in recent years at around 82-84 million barrels per day. Yet despite flat oil output, it’s apparent that refinery output has steadily increased. Why?

Refinery output has increased due to the proverbial “better living through chemistry.” That is, engineers continually figure out more ways to squeeze more barrels of refined product out of the same amount of raw material. More specifically, refiners take low-cost oil fractions — like distillates, which used to go to asphalt or bunker fuel — and upgrade them to higher-priced chemicals and fuels. More bang for the buck, more bucks for the barrel.

Who’s Burning Oil?

As the graphs up above indicate, oil consumption is growing fast in the Middle East. There, population has exploded in the wake of several decades’ worth of more babies and longer life spans. That, and there’s rapid, energy-intense industrialization all across the region. Plus, most Middle Eastern nations heavily subsidize energy use by the populace.

Of course, growing internal oil use across the Middle East leaves less oil available for export. Is that a problem? We’re about to find out. We’re exactly on the cusp of that thorny issue. Saudi Arabia’s so-called “spare capacity” is getting squeezed. It’s a problem, and it could transform into a really big problem in short order. Stand by.

The graph above also shows crude oil consumption growing strongly in Asia-Pacific, Africa and South/Central America. It’s the well-known story of how the developing world is… developing.

Billions of people are moving toward a higher standard of living. That requires oil.

That’s all for now. Tune in tomorrow for Part II of this discussion…

Byron W. King

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Byron King

Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Byron King's Military-Tech Alert, Outstanding Investments and Real Wealth Trader.  Byron has made frequent appearances in mainstream media such as The Washington Post, MSN Money, Marketwatch.com, Fox Business News, CNBC's Squawk Box, Larry Kudlow, Glenn Beck and PBS Newshour. He also had a feature article written in the Financial Times, and has appeared on both CNN and Marketplace radio broadcasts. Byron has also been quoted in various international publications such as The Guardian and De Volkskrant, and has been a guest on Canada's CBC television broadcast.

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