Sorting Out the Peak Oil Confusion

There's a peak oil heckler outside my office.

I pass him every morning in the parking lot. Like a gnat, he buzzes around and refuses to leave me alone, no matter how much I swat... My own personal fan, as I like to call him.

Each verbal prod or poke causes me to react in the same manner. I laugh all the way to my desk.

My mirthful response is due to the fact that he shares a very common trait with many of the antagonists I come across on a daily basis: denial. 

And just like theirs, his misconceptions lead to a dangerous line of thinking.

Not only are his peak oil rants hand-fed to him by certain media outlets; but he doesn't seem to care whether or not the information is even legitimate.

I guess I shouldn't be surprised by how easy it is to mix things up. But time and time again, there's one subject at the top of his list...

"The world has plenty of oil"

That phrase is constantly shouted at me, often by caps-lock-obsessed people like my fan.

And every time I hear it, I chuckle. Because they're right.

We do have plenty of oil left in the earth — certainly enough to last until we shift our energy demand to renewable energy. Unfortunately, he and everyone else using this line of reasoning are making a serious mistake.

They're asking the wrong question. I believe it's the most common misconception in the entire peak oil debate.

You've seen me splash this answer on the pages of Energy and Capital too many times to count, so if you're one of my veteran readers, please bear with me a moment...

It's not about how much oil is left in the ground; rather the rate at which we can produce that oil.

We all know the bathtub metaphor. If we could fill a bathtub the world's remaining crude oil, there'd be no reason to worry. But if you only have a tiny straw with which to extract the oil from the tub, the situation dramatically changes.

Now, our current situation isn't as simple as that. The oil we're trying to produce is much more expensive to extract.

And you can see that much for yourself...

Declining production: The 6.7% fear factor

With the average decline rate for oil production at about 6.7%, the world needs to find roughly five million barrels per day of new oil every year —  just to make up for the loss from natural decline.

And that decline rate will only rise. Several years ago, most analysts believed the annual decline rate was closer to 4.5%.

Considering the easy-to-get oil from the world's super-giant fields is declining, more of the world's production is coming from non-traditional means, and some sources like deepwater wells are cursed with much steeper decline rates.

Besides, we're literally going to the ends of the earth for just a chance at new oil supplies. Anyone else remember when the Russians boldly planted their flag on the Arctic seabed?

Think of the once-mighty Ghawar oil field...

Ghawar is the world's largest oil field, pumping out approximately five million barrels per day. That single field has been responsible for nearly 65% of all Saudi oil production from 1948 to 2000.

Taking that into account, oil producers must come up with a new Ghawar each year just to make up for the losses from natural decline. That's approximately five million barrels of new oil per year that we have to make up for.

Take a moment and give that some perspective.

Rethinking unconventional oil

As Nick Hodge reminded you yesterday, the reliance on unconventional oil and gas resources is becoming greater.

You have to wonder how much oil left in that bathtub is the easy-to-get stuff. And people often misunderstand how deep the tub is.

While we're at it, let's clear up one of the biggest misconceptions about unconventional oil — that we have trillions of barrels of oil from shale.

I can only hope you aren't among those who believe this.

Never mistake the Green River oil shales in Colorado and Wyoming for the shale boom happening.

Yes, there is a huge amount of oil there; but I have little faith that companies will ever succeed in reaching commercial production.

At the very least, ramping up production from the oil shales in Colorado and Wyoming would take decades. Unless a miracle happens, the cost would be enough to cause the wealthiest investors to cringe, flushing and shaking their heads with an emphatic “No!”

And, dear reader, this is where the hecklers truly show their ignorance...

“Well if it worked in the Bakken shale, it'll work there,” they say.

When you hear that, you know they're clueless.

To start, oil shale deposits (such as those found in the Green River formation) are the best example of unconventional oil out there. It's not even oil — rather sedimentary rocks that contain a large amount of kerogen. Kerogen requires much more processing.

It's a far cry from the light, sweet grade of crude that made Jed Clampett smile...

If we ever reach the point of developing the Green River Shales, we'll literally be scraping the bottom of the barrel.

The shale oil that you've heard about in the Bakken formation is actually light, sweet crude in an unconventional reservoir rock with low permeability. The problem has been that producers don't just stick a vertical well down and expect to hit pay dirt...

They are, however, becoming more efficient with each horizontal well they drill.

Right now, I'm putting the finishing touches on a new report highlighting one such opportunity taking unconventional production to the next level.

You'll hear all about it very soon.

Until next time,

Keith Kohl
Editor, Energy and Capital

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