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Has Technological Progress Made Peak Oil Theory Irrelevant?

In 1956, Marion King Hubbert, a prominent geologist for what is now Royal Dutch Shell (NYSE: RDS-A  ) , made a bold prediction. Based on an extensive analysis of reserves and production data, he concluded that U.S. crude oil production would peak at some point in the late 1960s or early 1970s, after which it would begin an inexorable decline.

For decades, his dire prediction looked startlingly accurate. In 1970, U.S. oil production reached 9.6 million barrels a day -- a level that hasn't been equaled since -- and then began to decline. It fell steadily from 1970 to 1976, and then rose modestly until 1985, after which it once again slipped into a steady decline that lasted for more than two decades.

Hubbert's prediction laid the path for what has since become known as peak oil theory, a highly influential theory that argues that global oil production is rapidly approaching, or has already reached, a peak. Some advocates of the theory even warn that once oil runs out, chaos will ensue, leading to "war, starvation, economic recession" and perhaps "even the extinction of homo sapiens."

A line of cars at a gas station in Maryland in June 1979. Photo Credit: Wikimedia Commons.

But then something happened that almost no one had predicted. Starting in 2008, U.S. crude oil production began to grow, slowly at first and then much more rapidly after 2011. Last year, it averaged nearly 7.5 million barrels per day, the highest level since 1989, and recently reached 8.43 million barrels per day, a level not seen since October 1986. So what happened?

How technology changed the game
At the risk of oversimplifying, technology happened. Specifically, the widespread application of advanced drilling techniques, including horizontal drilling and hydraulic fracturing, allowed energy companies to tap vast deposits of oil and natural gas buried in shale formations thousands of feet below the ground.

Not only have technological improvements boosted U.S. crude oil production to levels not seen since the 1980s, but they've also helped boost crude oil reserves to their highest level since the 1970s. As of the beginning of 2013, U.S. proven crude oil reserves stood at 30.5 billion barrels. That represents an increase of 11.5 billion barrels, or 60%, from year-end 2008 levels, even as 8.4 billion barrels were produced over that time period.

Proven reserves are defined as those that can be economically extracted at current prices using existing technology with a reasonable degree of certainty, meaning a probability of at least 90%. The reason proven reserves have increased so sharply is a combination of new discoveries, more thorough appraisals of existing fields, and technological improvements that have improved recovery rates.

Shale resource potential continues to grow
Take North Dakota's Bakken shale, for instance, one of the largest shale oil discoveries in North America. As operators have improved their drilling techniques in the Bakken over the past few years, they've opened up an entirely new play called the Three Forks formation -- a deeper, separate formation that rests directly below the Bakken and extends much further out into parts of Montana and South Dakota.

An oil rig in North Dakota's Bakken shale. Photo credit: Ole Jorgen Bratland / Statoil ASA.

As a result, total reserves for the Bakken/Three Forks are now estimated to be almost 900 billion barrels, up from roughly 570 billion barrels in 2010. While only about 3.5% of this oil is currently thought to be recoverable, technological advances could drive that percentage significantly higher. Already, improvements in drilling efficiency and smarter well completion methods have allowed several Bakken operators to coax much more oil and gas from their wells.

For instance, Continental Resources (NYSE: CLR  ) , the leading Bakken driller, has seen tremendous initial success from testing tighter spacing between its wells. The company recently drilled 14 horizontal wells spaced 1,320 feet apart in the in the southern part of its Three Forks acreage that produced 50% more oil and gas in their first three months of production than the company's average Bakken well.

This technique of spacing wells closer together -- known as downspacing -- is also yielding encouraging results for Kodiak Oil & Gas (NYSE: KOG  ) , another Bakken driller that's currently evaluating 800-foot spacing and 600- to 650-foot spacing between wellbores as part of its Polar Pilot projects. Initial results from these pilot programs suggest that the company will be able to unlock additional drilling locations through tighter-density drilling without interfering with existing wells.

Is peak oil theory still relevant?
As these examples highlight, continued improvements in drilling technology have allowed energy companies to tap previously unreachable shale formations, resulting in a sharp increase in production and reserves. In the years ahead, operators may turn to enhanced recovery methods such as carbon dioxide injections to boost recovery rates even further.

Still, I don't think these developments render peak oil theory irrelevant. Even though technology has unlocked vast new reserves, fossil fuels are finite resources, after all, and will eventually run out. Technological improvements can merely extend the amount of time before that happens. Eventually, though, there's no denying that we must wean ourselves off fossil fuels.

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Read/Post Comments (7) | Recommend This Article (4)

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  • Report this Comment On May 31, 2014, at 7:46 PM, Argonaut2013 wrote:

    You have it completely wrong - there is a LOT of oil left but the problem is that is it VERY expensive to find and extract.

    High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes ===== economic death spiral.

    Compounding the problem is the fact that a weak labour market means real wages drop - as they are across the world right now - that means everything is more expensive and your buying power is dropping at the same time.

    Governments recognize this and are trying to offset with debt, easy lending (they are purposely inflating bubbles), lower interest rates and money printing.

    Of course they will fail - because the disease is expensive oil. And there is no substitute

    The economic death spiral will accelerate when the QE and ZIRP no longer have any effect and the confidence game collapses.

    This moment will be known as the end of the industrial revolution by the few who survive.

    This is not a Hollywood movie where the hero saves the day. This is the reality we are facing.


    According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.

    So $10 slices 0.4% off growth --- what does a sustained price of over $100 do to GDP?

  • Report this Comment On May 31, 2014, at 11:49 PM, KHubbert wrote:

    To even imply U.S. energy independence is crazy and nonsensical. We're at the top of our game right now because of fracking (which is no going to last more than a couple more years of growth) and we still import HALF of the oil we consume.

    Fracking is not new technology, by the way. It's been around at least since the 1970s, it's just that because we're running out of the cheap, easy oil, now we need to frack, drill in the deep sea, and mine tar sands.

    We are approaching the end on an era, and technology will unfortunately not be too helpful in replacing the old black goop that we have been so lucky to have for the last 200 years. The upside? The end of wasteful living and degradation of our little globe floating in space.

  • Report this Comment On June 01, 2014, at 6:07 AM, Beery1 wrote:

    "once oil runs out, chaos will ensue"... "fossil fuels are finite resources, after all, and will eventually run out."

    The first thing anyone should learn about peak oil, BEFORE they start writing articles about it, is that it has nothing to do with "running out of oil". The problems caused by peak oil come shortly after we reach the global peak, which is happening about now, despite the modest gains we see from fracking.

    The ability of companies to use fracking (an old technology made economical by high oil prices due to the approach of the global peak) has given us a few years of respite, but fracking can never bring the US anywhere near a new peak for oil production (which happened in 1970 just as Hubbert predicted). Fracking will allow us to stay addicted to oil for a little while longer, but after that all it does is make the decline even steeper, which will make it harder for us to transition to other energy sources.

    In short, fracking is not the panacea that certain people think it is and the chaos that is likely to come when the music stops is not centuries or decades away - it is right around the corner, and articles like this make sure it will be worse than it has to be, because all such articles do is tell people they don't need to prepare for the different world that is coming.

  • Report this Comment On June 01, 2014, at 6:58 AM, RushLimbutt wrote:

    It is encouraging to see an article on a financial website that acknowledges that oil is finite and we need to come up with a replacement.

    And unfortunately, we will get off it. The OECD countries have already had to cut back their consumption due to more and more of the limited supply going to the beneficiary of so much OECD job export: China. When global production peaks in a few years (conventional crude oil production has already peaked in 2005) we will see more and more cutbacks by everyone - each and every year, as production continues on a terminal decline slope down to zero.

    It will be quite a shock to the world, particularly the techno-optimists and cornucopians who will have to finally face up to the reality that they have been trying so hard to wish away.

  • Report this Comment On June 01, 2014, at 8:25 AM, Beery1 wrote:

    As for peak oil being a "theory", no. It's a fact proven by every oil well, every oil field and every oil region ever reached a peak and entered decline - and that's most of them. The idea that it's merely a theory is even more evidence that the writer doesn't know what he's talking about.

  • Report this Comment On June 03, 2014, at 12:26 PM, Universling wrote:

    "...produced 50% more oil and gas in their first three months of production than the company's average Bakken well."

    Yes and due to this process also saw sharply increased decline rates compared to average wells.

  • Report this Comment On June 08, 2014, at 11:56 PM, David2015 wrote:

    "fossil fuels are finite resources, after all, and will eventually run out." Please allow me to interject some (unwelcome?) scientific rigor. By definition, "fossil fuels" are the product of photosynthetic activity from long ago. Conventional belief is that the Earth's atmospheric oxygen is the result of the same photosynthetic activity from long ago. If these beliefs are correct, then the amount of oxygen in the Earth's atmosphere is commensurate with the amount of "fossil fuel". Allow me to advocate for the Devil and suggest we burn "fossil fuel" until we run out of oxygen!

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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