Topic: Peak oil

In a Nutshell

Until a replacement is found, crude oil will remain the most critical fuel which powers the world’s economy, command an outsized impact to the world’s financial system, and be the source of much geopolitical turmoil. Yet, the dynamics governing the supply and demand of this strategic commodity and how the wealth generated from it drives the financial system remains poorly understood.

FAQ

Crude oil and its derivatives are the most versatile, portable and dense energy which humans have ever discovered. We have yet to find a replacement containing comparable attributes, as the world’s known supply is steadily depleting. Consider also:

90+% of the world’s transportation runs on liquid fuels derived from crude oil.

Plastic and a ton of other petrochemical products are derived from crude oil for which there is currently no substitute.

Much of the world’s fertilizers are derived from crude oil for which there is no substitute.
end

About 85 million barrels per day.

Conventional oil is extracted using traditional drilling processes whereby oil trapped in a reservoir is forced out of the ground under pressure.

Un-conventional oil does not come out of the ground under pressure but has to be extracted by other means. Examples of un-conventional oil include:

  • Tight oil – oil is extracted using hydraulic fracturing (fracking) to break up the rock formations where the oil is trapped.
  • Oil sands – heavy and thick bitumen needs to be heated and diluted before being refined into crude.
  • Arctic and deepwater oil – the oil fields are located either in ultra-deep ocean beds or in hostile environments.

The vast majority of oil is conventional oil and comes from mature fields. Conventional oil production has stayed stagnant or barely grown since 2005.

Un-conventional oil is a lot more expensive to produce. In other words, the term ‘un-conventional’ is a euphemism for expensive.

No, tight oil from the US amounts to about 4% of the world’s production. So in the overall scheme of things, it is not a game changer one way or another, regardless of the hype from the media and industry.

Since the Q3 of 2014, the world has swung to a supply surplus of about 1 to 2 million barrels per day. The nature of commodity pricing caused the price of oil to crash as a result. With global consumption being about 85 million barrels a day, 1.5 mbpd represents a surplus of just under 2%. If that is considered a glut, then, yes, there is a glut.

The recent surge in production from the tight oil ‘revolution’ and the price crash have caused the vast majority of the people to wrongly conclude that Peak Oil is a myth and the world is suffering from too much oil. But consider this:

  • Conventional oil – the easy oil – production has been stagnant since 2005 and most if not all conventional oil producing countries have either plateaued or are in terminal decline.
  • Un-conventional oil – by the most optimistic forecast (EIA), tight oil production will peak around 2020 and steadily decline thereafter. That’s four years away.

Not only is Peak Oil alive and well, it is happening right under our nose.

The short term price of a commodity is driven by many supply and demand factors, the most important of which are:

  • The tight oil companies are producing oil at a loss. The industry collectively has not made a penny since the so called ‘revolution’ began. Driven by the insane zero interest rate policy of central banks, the capital markets are happy to let these companies literally drill their money into the ground.
  • The Saudis, in an effort to maintain market share and hurt Russia in its geopolitical struggle with Iran/Syria, ramped up production in order to drive down prices.
  • The world economy is rapidly cooling, reducing demand.

Guide

 


CCC-Rated Junk-Bond Yields hit 20%, Blow Past Lehman Moment, Consensual Hallucination Wanes

Junk bond yields hit 20%,  as high as 2008 just after Lehman Brothers filed for bankruptcy, plunging the world into a global financial crisis.

February 4, 2016

Tight Oil’s First Domino Reloaded: Bank Exposures

As tight oil and gas companies kick the bucket, the contagion begins to spread to the banks with significant loan exposures to the energy sector.

January 24, 2016

Energy Creditors Lucky To Recover 15 Cents On The Dollar In Bankruptcy

42 tight oil and gas bankruptcies in 2015 with $17.2 billion debts. Recoveries average 15 cents on the dollar for secured and unsecured creditors.

January 24, 2016

World’s Largest Miner Books Massive $7.2 Billion Writedown On US Shale “Assets”

Mining giant BHP Billiton has just written off $13 billion of its $20 billion US shale oil and gas asset purchases since 2011.

January 18, 2016

The Crude Oil Export Ban–What, Me Worry About Peak Oil?

Last week Congress ended the US oil export ban, ostensibly due to the over-abundant supply from tight oil. But the irony, as Art Berman explains, is that the US is far more economically vulnerable and dependent on foreign oil today than it was when cru …

December 28, 2015

World Oil Supply & Demand from a Different Perspective

The recently released EIA global crude oil data gives a different perspective on the consumption side of the equation and serves as a good proxy for the relative state of the world economic regions.

November 28, 2015

The Trouble with Big Oil in One Chart

The trouble faced by not only shale oil companies but also Big Oil can be summarized in one chart from a recent BP presentation.

October 20, 2015

5 Triggers to Come-To-Jesus Moment for Tight Oil

As much as one thinks times are tough now for the tight oil sector, these 5 triggers arriving within the short term horizon have the ability to upset the entire apple cart and then some.

September 5, 2015

U.S. Shale Gas Production Outlook Update

After raining on the EIA’s Monterey shale oil parade resulting in the department’s subsequent jaw dropping 96% sobering haircut of the formation’s oil reserve, David Hughes, in Drilling Deeper and its latest updates, further challenges the EIA’s tight oil and shale gas production predictions.

May 11, 2015

Insane Policy Driving Stupid Money to Fuel Tight Oil Boom

The repressive interest rate policy of the Fed drove stupid money into the tight oil industry, the commercial viability of which is at best questionable at the price of oil much higher than the current level.

April 29, 2015