Has Technological Progress Made Peak Oil Theory Irrelevant?

How radical advances in technology have invalidated M. King Hubbert’s bold prediction that U.S. crude oil production would decline steadily after peaking in 1970.

May 31, 2014 at 4:43PM

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."

Line

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.

Images

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.

OPEC is absolutely terrified of this game-changer
As the debate over peak oil theory highlights, America's domestic energy landscape is changing radically. U.S. oil production continues to surge as our country moves closer to energy independence. And there is one company front and center that is poised to make its investors rich. Warren Buffett has already committed to it, and you can too. Click here to learn about this company in the Motley Fool's special report: OPEC's Worst Nightmare.

Arjun Sreekumar and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers