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Monday, February 18, 2013

Delusional Thinking On Oil


 Much had been made recently of the increase in oil production in 2 formerly tapped out oil fields:the Eagle Ford formation in West Texas, and the Bakken formation in North Dakota. The story goes that, thanks t new space age technology, we are able to get previously unrecoverable oil through a process known as "fracking", or hydraulic fracturing of shale which enables trapped pockets of oil to escape. This has resulted in increased production at both of these oil fields, and seemingly, has solved he problem of "peak oil". Withing a few years, it is said, we will surpass Saudi Arabia oil producer in the world.
It has been a while since i have looked at the world energy picture, which was a frequent theme n this blog prior to 2008. The main reason it fell off my radar was that world wide, demand had dropped, due to decreased economic activity caused by the financial,crisis and subsequent recession. Since supply remained relatively constant, supply and demand did not collide, and there was n energy crisis (although there was a substantial increase in the price oil). Oil statistics are available from a variety of places, bu he numbers are different (although close), so it is hard to tell which one to use. I arbitrarily picked the BP Statistical Review of World Energy, which has annual data going from 1965 through 2011, and decided o plu in a few numbers.  The blue line in the graph above is U.S. oil production, the red line is Saudi Arabian oil production. Both of those graphs are on the same scale. The red bars are world wide production, that graph is no to scale. As you can see, U.S. oil production is in a long term decline, with a spike up in since 2008. In a stock chart we would call it a "dead cat bounce". Saudi Arabia, while slowing significantly, is still increasing their output. In this chart, world output has increased at about the same rate that Saudi oil has. World output has increased very little since about 2005 (data from some other sources has current production less than that in 2005). All in all, there has been an increase in production, but why so small?

First of all, most existing major oil fields are in decline. Any gains by new technologies or discoveries will, at best. increase output very slowly, and at worst, just slow the rate of decline. And what is worse, "fracking" is actually not new technology: it was first done in 1947, and the technique has been well known for decades. So what has changed, that makes fracking a viable alternative? One thing has changed: the price of oil. It is now profitable to squeeze the last few barrels of oil out of exhausted oil fields, because oil is now high enough (the threshold is somewhere near 70) to make it profitable.  Drop the price of oil, and fracking stops dead in it's tracks (as in 2008, when oil crashed after hitting it's all time high).  One of the problems I have with the story being spun in the mainstream media is that fracking will increase our production by 2 million barrels a day per year, which is about the amount it has increased production since it began in earnest in 2010. The assumption is that fracking could be used to increase production on all oil fields (not true, it us useful only where shale formations have trapped oil and gas pockets in them), and that the current rate of production is sustainable. That has yet to be proven: both these fields were pretty much tapped of conventional, recoverable oil, and it is unknown how much of the trapped oil is recoverable, but it's hard to believe it would be greater than the amount of oil already recovered. The idea that we can increase our production enough to overtake Saudi Arabia, considering the amount we would have to increase by, and keep oil high enough to make it profitable, is at best, delusional. Unfortunately, this is the type of thinking that is dominating the mainstream, and like the thinking that created the Nasdaq and housing bubbles, could lead us right into the jaws of trouble. Let's hope some saner thinking prevails. I will be revisiting this subject in the future.

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